Bank requirements to finance franchise acquisition
Franchisors and franchisees have to make various financial considerations when engaging in a franchise relationship. The last two articles explored these, today’s article shifts to franchisee financing from the banker’s angle.
Due the very low incidence of franchising in Africa outside South Africa and Egypt, commercial banks here treat franchise financing like any other SME or corporate financing. They assess the financing risk purely on the traditional approach and offer similar products as in any other businesses.
This is unlike in markets with developed franchising sectors where banks have franchise relationship officers specifically serving franchise-specific bank products to franchise businesses. It is noteworthy, however, that some of those banks with roots in such franchise economies follow the franchise brands into Africa and tailor franchise-specific products for them through the bank branches, but generally speaking, such products are not available over-the-counter.
Some local banks don’t even know what to include as a franchise-specific bank product. This article assumes your bank knows franchising and can isolate it from normal businesses.
To obtain finance a prospective franchisee/entrepreneur needs to convince the bank that he will be able to pay the money back. Various documents and other information need to be prepared and ready for presentation to the bank to enable the bank to assess the opportunity objectively.
The bank requirements when applying for finance are generally as follows. First, the business plan, a very important document because of the detail it contains.
As such, the business plan is often referred to as the written road map of a business. It gives the bank insight into the thoughts and strategies the potential franchisee has for the business (s)he wishes to fund. It also helps the bank to understand the business and the environment in which it will operate. It outlines the plans of where the business is going and what has to be done to get there.
From the financial institutions point of view the importance of the business plan can be summarized as follows: It is a management tool that clearly reflects the vision and mission of the business, its objectives and methods on how to achieve them. It is a tool for running and growing the business and what approach will be used. It contains the financial planning for the business.
This identifies the funds needed to start and operate the business. It also reflects on the amount to borrow. The business plan is also used by banks to help determine the feasibility of the idea and whether the business is likely to succeed. It helps the bank to get an insight into the industry and to benchmark the business against competitors.
Second is the franchisee’s personal balance sheet. This information is required mainly to determine the solvency of the person/people behind the business especially when they will be signing suretyships that banks will be relying on.
It is also an international best practice that the franchisee has at least 50 per cent of the required franchise investment in unencumbered cash as a show of commitment to the cause. Their personal balance sheet will reveal this.
Third is the franchisee’s CV. It helps the bank to know the customer better. The franchisee’s qualifications and skills including management, technical, financial and marketing skills, will enable the bank to assess whether the franchisee has the necessary skills to succeed in the chosen business.
Even where industry-specific experience is not required, a bank can easily assess the applicant’s chances of success based on the CV.
Due the very low incidence of franchising in Africa outside South Africa and Egypt, commercial banks here treat franchise financing like any other SME or corporate financing.
Some local banks don’t even know what to include as a franchise-specific bank product.
The writer is a Franchise Consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.
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