Show Me The Money
The SMME sector accounts for 66 per cent – 16.5 million – of all jobs in South Africa, says the Department of Small Business Development, but for many, funding a franchise or a start-up can be challenging.
Partnering with an established brand is beneficial when applying for finance, says Nico Botha of Inani Incubator Accelerator, a nonprofit company that bridges the gap between the private and public sector for training, human capital development, funding and business support services. “The brand strength of a proven business model is definitely an advantage, showing that an established support structure and quality control exist,” says Botha.
Franchises have established business models, operational systems and training for franchisees to operate their respective franchises, says Morne Cronje, head of franchising at FNB. “Providing these skills reduces the cost of an individual developing their own model.” He adds that this further reduces the risk for banks as there is a track record of existing stores, which can be useful when considering opening a site. As many small businesses have been significantly impacted by COVID-19, Mercantile Bank, a division of Capitec Bank Limited, also considers if the franchisor is offering relief measures, such as terms with stock supply or payment holidays, during this time.
The portion of the financing that a bank will provide for a franchisee can range from 40 to 70 per cent depending on the industry or the concept. “The norm in the industry for unencumbered own contribution/investment from a franchisee’s own pockets is 50 per centof the finance requirement,” says Cronje. Franchisors often prescribe the unencumbered cash contribution based on their business model. “This is to ensure that the business can afford lending levels to operate profitably and not labour the business with debt and ensure a healthy return on investment.”
However, the contribution from the franchisee – be it 60 or 30 per cent – must be unencumbered finance, meaning that it is not listed as collateral for any other debt. Other contributing factors include the location of the business and standing of the franchisor,
Some banks take a cautionary approach to lending to franchisees, especially if the brand is not well known, so many entrepreneurs opt for alternative funding streams. This may come either from the government in the form of grants, tax incentives, loans or equity finance, or from business development investors and other lending companies.
Mxolisi Matshamba, CEO of the Small Enterprise Finance Agency (Sefa), says the government has established development finance institutions whose primary mandate is to support SMMEs that are unable to attract private sector funding. Sefa is one of these, alongside its sister agency, the Small Enterprise Development Agency (Seda). “Sefa provides financial assistance to a maximum of R15-million, whereas Seda provides business development and services,” explains Matshamba.
The funding is geared towards assisting entrepreneurs to establish, acquire or expand their businesses, says Matshamba. “Funding instruments can be packaged as asset finance, term loans and/or bridging facilities. Sefa plays a pivotal role in supporting reputable franchise brands that intend to expand and create sustainable jobs.”
Canvassing for cash
The SME South Africa Report (2018) revealed that a considerable 94 per cent of respondents did not receive government funding. Of those, 9 per cent said they borrowed from family and friends. A quarter said they relied on financial support from business incubators, while 20 per cent sought funding from large financial institutions.
Business development investors offer various forms of funding and are often open to supporting start-up businesses. Examples of financial resources include a hybrid model between venture capital, private equity, and/or angel funding (less risky debt versus higher risky equity). This may not necessarily involve taking up shares in the business; the investor could opt to partner on specific transactions so that the business is best able to deliver on its contracts.