Due to the current economic circumstances it proves quite difficult and very onerous for a franchisee to successfully apply for franchise funding.
The two main stumbling blocks when franchisees apply for finance are:
- Insufficient own contribution
- Insufficient collateral or security
It is clear that if a franchisor wants to achieve sustainable growth, they will need to start becoming more innovative to provide assistance to potential franchisees seeking finance.
Here are some innovative ways in which existing franchisors have assisted their franchisees:
One of the popular specialist retail franchises provides a stock buy-back guarantee to the banks, meaning that if the franchisee defaults on repayments to the bank the franchisor would purchase the stock back from the franchised outlet and the bank is paid from the money received from the sale of stock. This reduces the bank’s risk and therefore they tend to be more lenient on their collateral requirements under such an arrangement.
Stadium Fast Foods
The fast growing fast food franchise from Bloemfontein are so confident in the success of their outlets, that they provide their franchisees with a buy back guarantee, meaning that if the franchisee is not profitable in running the business within the first year, the franchisor guarantees that they will buy the entire business back from the franchisee. This should give financiers total comfort of knowing that there is a willing buyer for the business and that debt will be settled should the franchisee need to exit and sell the business.
A number of franchisors also assist franchisees in two ways:
- Joint ventures – the franchisor takes equity in the franchised outlet meaning they assist by covering half of the setup costs, leaving the franchisee themselves with a smaller portion to finance.
- Self-funding – some franchisors have a fund whereby they extend loans to franchisees which are usually at lower interest rates than commercial funding and also saves the franchisee from complying with stringent lending criteria of commercial banks.
It is also helpful for franchisors to develop relationships with commercial banks and other lending agencies by supplying them with accurate up to date information on the franchise, thereby the banks develop a feel and trust for the brand. This relationship of good standing can have long term advantages for the franchise such us reduced collateral requirements due to the brand being perceived as less risky.
Examples from the USA
Access to finance has been identified as a major stumbling block in the USA and many franchises are forced to come up with solutions to assist franchisees with financing.
Custom swag retailer Instant Imprints offers financing at zero-percent interest for two years.
Marco’s Pizza raised $5 million in private equity funding to help franchisees with down payments.
Hurricane Grill & Wings raised $10 million toward financing for new and existing franchisees.
Auto body repair and paint franchisor Maaco offers lower license fees and reduced royalties for multi-store operators.
Gold’s Gym opened a new financing arm to help would-be and existing franchisees secure funding.
Massage Envy has partnered with Franchise America Finance to help franchisees secure loans.
Service-based franchisor The Dwyer Group finances up to 80 percent of its franchise fee for up to eight years.
CiCi’s Pizza will take a minority stake in restaurants developed by multi-unit franchisees. The company has set aside $5 million for the program.
Through its Green Associate Assistance Program, Spring-Green Lawn Care will apply up to $10,000 of its initial franchise fee toward startup expenses for candidates who own or are employed by green-industry businesses.
As from the above examples you can see that there are a number of ways in which franchisors have already come to the party to assist their franchisees to obtain financing. We strongly recommend that more franchisors attempt the same, because invariably, the strength of a franchisor lies in the growth and sustainability of the number of franchised outlets, the easier they can make the financing process for a franchisee, the more outlets that can be opened.