last updated 31/03/2022
Business Funding For Franchise Buyers
last updated 31/03/2022
Daniel Cloete from Westpac on new opportunities, new rules and the availability of funding for franchisees
With countries around the world opening up their economies, and New Zealand starting to follow suit, a lot of people are looking at business opportunities anew. But what will ‘the new normal’ look like, and which industries will do well in an environment where inflation and interest rates may be higher than we have been used to in recent years?
Covid presented high risk for small businesses, especially in the hospitality, tourism, and retail space, whilst other industries were much less influenced. The normal benefits of franchising, such as systems, marketing and joint purchasing – not to mention the support of franchisors and other franchisees – proved to be very valuable to franchisees during this time.
Now, savvy businesspeople are evaluating opportunities that may present themselves as the cycle changes. Many systems have already adapted their business models, achieving improved product margins or reduced investment levels. There may be sites available in locations where franchisees could not find a suitable store before, or at a rent ratio that now fits the franchise’s profitability model. New technology or an increased digital presence provided by their franchise system may also create new opportunities for franchise buyers. And, in some sectors, franchises have too much work and are keen to appoint new franchisees to handle it.
It’s a time to explore different options. But how easy is it to access funding from your bank to set up a new business, or grow an existing one by adding more capacity or more outlets?
New rules around personal lending
The personal lending side, in many cases, tends to be linked to business lending for franchisees. It is therefore worth noting that amendments to the current CCCFA (Credit Contracts and Consumer Finance Act) legislation have enhanced requirements from 1 December 2021. These include the following areas, which impact upon personal lending products like housing and credit cards:
- Affordability assessments in terms of collecting, verifying and evidencing extra information from customers for lending applications.
- Updated suitability inquiry, assessments and informed decision conversations, etc.
The result of this is that the time to turn around funding requests has increased. This means that it would certainly pay to engage with your bank (as well as your accountant or other financial advisors) as early as possible, to make sure you have the correct mix and level of funding in place to support your business purchase or growth plans.
Can I have 100% financing?
This is a question we often hear from people who have found their ideal opportunity but lack the money to buy it. The answer is, ‘Yes, you can’ – subject to certain requirements.
Your bank will look at how much money or equity (eg. the value of your house or other investments) you are prepared to put in yourself as secured lending – usually, at least 50 percent will be required. The balance will be loaned against the business itself if the strength of the brand justifies it. Before agreeing to such an arrangement, the bank will consider the security offered, your financial record and proven business acumen, as well as other factors if applicable.
Note that the mix of secured and unsecured lending as well as the term of the finance can dramatically influence the monthly repayments. Secured lending can be structured over a longer term, lowering the required monthly payments. The business lending (typically a business term loan of three-to-five years) would use a GSA – General Security Agreement – and would be more expensive than the fully-secured part of the lending: how much more costly would depend on the risk. Vehicles or equipment can also be purchased through equipment finance or leased, lowering the initial capital requirement further, but this tends to be more expensive again.
The biggest question of 100 percent finance (or any other level of finance, actually) is, ‘Can the business afford it?’ Your accountant and banker can look at different options to suit your requirements. Under-capitalisation is one of the greatest causes of business failure: even the best business can be brought down if it is struggling under the burden of too much borrowing, which is why it pays to be careful. On the other hand, wisely-structured borrowing can enable you to take up a good opportunity, repay the loan and enjoy the income you earn.
The important things to remember are:
- The business loan should be capable of being repaid within the term of the franchise agreement or, if not, this should be taken into account when selling.
- Payments must be affordable.
- Get the right mix of short- and long-term funding. Discuss your future business plans with your franchise banker. If you want to open a second franchise in 18 months, the funding structure can be very different to make it possible.
- Always take appropriate legal and financial advice.
For existing businesses, we have found that there is currently an increased demand for working capital, mainly due to supply chain issues, customers taking longer to pay, seasonality over the Christmas period, or legacy issues from the lockdown cycles. Much of that may not influence a trading business that gets paid immediately, but it would be good to have a close look at the working capital requirement of your business.
Banks are certainly keen to support their business customers in buying or growing profitable businesses, but may have a closer look at projections and assumptions in the current environment. Similarly, as Adrian Orr has said, the Reserve Bank is keen for the banks to support the business recovery from the Covid pandemic.
Points to remember
Before committing yourself to any franchise purchase, you should determine how much finance you require and involve your banker and financial and other advisors in the decision-making process on the required amounts, terms, timing and mix of financial solutions that will best meet your needs. Remember:
- Your bank values your custom and wants to make it as easy as possible to obtain finance for the right business. The good news is that, in the case of franchising, funding will be available for profitable businesses from strong brands.
- Familiarise yourself with the processes and information required to obtain finance. This will help you to ask the right questions when buying a business, save a lot of time and effort, and put you in a much stronger negotiating position.
- The information that you need to assess the viability of a business opportunity is the same that the bank needs to process a finance application. Get the information, do it once and do it right. Use expert advice where necessary.
- In obtaining finance, you are entering into a long-term financial relationship with your franchise banker built on trust. This makes it important for the bank to look after your interests.
- Look at the services and added value that your bank can offer over the longer term after obtaining finance. You are in this together for the long haul, and informed relationship banking can make a huge difference to the eventual success of your business.
Daniel Cloete is the National Franchising Manager for Westpac. The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.
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