Do you need finance to buy a franchise?

In South Africa, a franchise is considered a separate, specialised field of business, and is therefore not put into the same category as buying an existing business. This is because franchises have a proven product, and they also offer a lot of support to the new business owner, so they are less risky for a lender.

To read more about buying an existing business, check out Do you need finance to buy an existing business?

Many lenders have divisions that focus exclusively on financing franchises. In some cases, lenders have developed strong relationships with specific franchise groups e.g. KFC. The lenders know the business models of these franchise groups and the support that they offer new business owners, so they have already negotiated to provide finance to new franchisees. 

It is important to know that not all franchises are considered safe. Lenders will have done their homework and have already drawn up their list of which franchises are doing well and which are battling, so this should also help you know whether you are making a sound decision.

In general, lenders are looking for a minimum contribution of 50% of the loan amount from you to finance the purchase of the franchise. You, the “franchisee” will have to provide this in unencumbered cash. You can’t borrow it. Lenders want to know they’re not going to face a situation where you are drowning in debt.

If you don’t have a spare R200 000 – R500 000 lying around, you might have to rely on equity finance or ask your friends, family and old business associates to help you buy the franchise. This way, one business partner pays cash for his/her share of the business, and the other raises a loan for the remaining 50% share.

We have discussed that lenders tend to provide finance more readily to franchises, than to other business models (such as start-ups). What is extremely important to realise though, is that the reputation of the franchisor plays a big role in the lender's decision.

You (and your lender) don’t want to invest in a fly-by-night franchise operator. Young, unknown, or small franchises may sometimes be grouped into this risky set, but if you are truly interested in the franchise and believe they offer a great system, you just need to work extra hard to convince the lender of why it’s a good deal.

A great place to look for information on credible franchises is The Franchise Association of South Africa (FASA). Franchise outlets can register with FASA, and if they meet certain franchise standards, they are listed as accredited members. The website www.fasa.co.za offers a wealth of information.

When lenders lend money to a business, they always want to know the details of the management team. This way they can come to a conclusion whether the team has the skills and experience required to make a success of the business. So expect some questions about your potential team.

Location is important in any business, but for franchises, location is vital. Often the success (or unfortunately, failure in some cases) depends on the suitability of the franchise’s location.

Again, the cost of the franchise will dictate which finance option is best suited to your needs. For large amounts, consider equity finance, government lending agencies and maybe term loans. For smaller amounts, consider personal finance such as a home mortgage, or credit and overdraft facilities. Government leading agencies are always a good option to explore if you are battling to raise the finance through conventional means.