South Africa

 
 

Frequently Asked Questions

Q. Why do I need to put up my own money to finance a franchise?

A. There are a few reasons for this:

  • If you can show that you have saved money, it indicates your ability to handle finances well;
  • If borrowed capital is the only source of finance, the cost of paying back interest can place undue strain on your business’s cash flow ;
  • Unless you have a meaningful stake in the business, your commitment could be suspect, as you would be able to walk away in the event of the business hitting a rough patch; and
  • For us to invest in your business, you need to show that you are willing to invest in it yourself.

 

Q. Why do I need to provide a business plan and what goes into it?

A. A business plan is an indispensable requirement for going into business, as it forms the basis of your planning. When compiling a business plan for raising finance, ensure that it covers the following:

  • Your own credentials – as the operator of the business, we will place reliance on you to ensure that the business succeeds. We also need to know that you will be hands-on in terms of managing the business, or if not, what the credentials of the operating members of the business are.
  • Competitors – provide an analysis of the competitors in your area and an estimate of realistic market share.
  • Area analysis – indicate the research done to determine the potential of the geographic area, the demographics and income levels in the area, as well as macro and micro factors influencing the catchment area and consumer behaviour.
  • The basis for financial projections must be clearly explained and all assumptions must be included.
  • If the franchise is bought from a previous owner and the new owner is forecasting a turnaround, the turnaround strategy must be explained.

 

Q. How do I do a Cash flow projection? 

A. The ability of your franchise to generate adequate cash flow is an important indicator of its  viability; unless the cash flow generated by your franchise can comfortably sustain on-going operations, you may run out of cash and will have to close your business’s doors.

 

To project the cash flow of your business, calculate the amounts of money you expect to receive during a specific period and deduct the amounts you expect to pay out. Remember that while a strong cash flow is important, it is not an indication of profitability. Growing sales can generate positive cash flow for a while even if the business operates at a loss, but this is not sustainable.

 

Q. What types of funding for franchises are available?

A. There are various types of funding you might wish to consider, however you should be aware of their respective advantages and disadvantages. Types of funding include:

 

  • Soft loans – You might have the opportunity to borrow funds from family or friends. For these funds to qualify as soft loans (also known as off-balance-sheet financing), it needs to be unsecured, open-ended (no fixed repayment date has been set) and possibly interest-free. Keep in mind that should your business fail, the lender/s will most probably not receive any of their funds back. Although it is an informal agreement, you should enter into a written agreement drawn up by an attorney, which sets out the terms of the loan and the rights and obligations of the parties. If you don't, the lender could, for example, decide to ask for his money back at a time when your business’ cash flow cannot support this request.

 

  • Taking on a business partner – You could invite others to join you in the venture through forming a partnership, a CC or a limited company in exchange for a share in the business. Taking on partners has the advantage of sharing the burden of building the business; however, you need to select the individual/s involved with care by ensuring that they share your vision for the business and possess complementary business skills.

 

  • Overdraft – An overdraft is intended to take care of short-term dips in your business’s cash flow. This need may arise around month-end for example, when you need to make payments but your customers haven’t paid you yet. Overdrafts should only be used to supplement working capital requirements (short-term finance), never to fund fixed assets (long-term finance).

 

  • Term loans – Term loans are used to fund long-term capital needs, and are usually granted for a period of up to 60 months.  Should you wish to terminate the loan before the agreed term has expired, a penalty payment will apply).

 

  • Asset finance – The purchase of capital equipment and cars can be financed through asset finance, which can be structured to suit your business' specific needs. The expected life of the item to be financed influences the repayment period, with the added advantage that the item to be purchased can serve as surety for the loan, at least in part.

 

Q. How do I go about applying for a franchising loan?

A. Following your initial discussions with your Business Banker, you will be asked to complete a loan application. As part of the loan application, you will be asked to submit various documents, your business plan and a cash flow projection.

BizDirect Response Centre

0860 109 075 / +27 11 299 4633

Bizdirect@standardbank.co.za