franchising aspects Sep, 09 2013

Financing your franchise

Young entrepreneurs’ dreams of venturing into a business can be cut short brutally in the face of shortage of funds. No matter the talent, business acumen and passion, without adequate finance, none of it proves useful when you need to start out. Hereâ€

By Parina Sood, TFW Bureau
Senior Sub-Editor
Financing your franchise

Franchising as a mode of business expansion has been on a rise. Realising the benefits of franchising, more brands are taking this route to increase their footprint.

According to a recent report by KPMG India Pvt. Ltd., India’s franchising industry is expected to quadruple in volume in the next five years, accounting for almost 4 per cent of India’s gross domestic product (GDP) in 2017. The industry is projected to provide almost 11 million employment opportunities by 2017.

Franchising has brought many sectors and businesses within the reach of small net-worth entrepreneurs. Not just metros, franchising provides equal growth opportunities to passionate individuals in tier I, II and III cities as well. However, one question on the mind of every potential franchisee is about procurement of funds.  Once you've read the literature, done your due diligence, considered the statistics on success and are dead sure that franchising is the best way you want to get into business; you need to ask yourself: where will you get the money to finance the franchise, royalty fees, inventory and working capital? Before you go about looking for loan and settling for some other option of procuring funds, determine what your net worth is.

Make a personal balance sheet and list both your assets (what you own) and liabilities (what you owe). Under assets, list all your holdings- cash on hand, checking accounts, savings accounts, real estate (current market value), automobiles (whether paid off or not), bonds, securities, insurance cash values and other assets and total them up. Now make a list of your liabilities. List your current bills, all your charges, your home mortgage, auto loans, finance company loans and so on.  This balance sheet will help you gauge as to how much of finance you can raise by yourself. Now subtract your liabilities from your assets. This will give you a clear idea on what your credit rating looks like.

All potential lenders look at some common elements in a credit rating. They are mostly stability, income and track record. But before you approach any lender or bank for external help, it is good to ask the franchisor himself. Ask him/her about various modes of raising finance that are best suited to his/her business. Many times franchisors too have a mechanism in place to financially help the potential franchisee. Some franchisors have tie-ups with lenders and banks which makes the loan process quicker and easier for the franchisee. Besides getting money with the franchisor’s help, there are several other options as well. Take a look.

Bank Loans

The best source for getting loans is a bank. The first challenge for any aspirant is to prepare a loan package for seeking a business loan. Banks want to work with serious borrowers. An entrepreneur should have all the necessary documents that a banker needs. Banks also look for specific information to understand if the business is fit according to their specific lending criteria.

Remember, banks work in an extremely professional manner and look at all business propositions with an inquisitive eye. The franchisee needs to be aware of all the intricacies of the business and have an exhaustive and comprehensive business plan with realistic financial projections. This will help banks understand the business proposition, which in turn will make them willing to invest in your business.

To help franchisees procure funds easily and help franchisor address his financial concern, two giants of the industry- SIDBI and Franchise India have come together. With a vision to make the ride for potential franchisees and even franchisors smoother and ease their difficulty vis-à-vis the ability to provide any collateral, SIDBI and Franchise India have come up with a funding initiative. The SIDBI-Franchise India MoU aims to make financial support available to emerging and established franchisors in India. This collaboration is in the process of devising relevant products for the franchise industry which will be offered to some selected franchisors as a pilot funding programme. On the basis of the evaluation, SIDBI-Franchise India is going to commercialise the franchising products for the Indian market.

NK Maini, Managing Director, SIDBI says, "Franchise-based businesses are gradually maturing in India and they offer very good entrepreneurial opportunities in diversified sectors. I congratulate Franchise India for their effort and hope that the deliberations will enable SIDBI to create a sustainable and robust financing for the franchise industry which in the coming years can be mainstreamed as a regular banking product."

SIDBI has also introduced its service sector scheme which will offer credit guarantee funds to Micro Small Enterprises (CGFMSE). In this, SIDBI will provide Rs. 1 crore loan guarantee to the lender bank on behalf of micro small enterprises. This collaboration has also set up a financing limit for the service sector enterprises. For micro service centers, Rs. 10 lakh of investment in equipment will be made excluding infrastructure cost. For small service centers, Rs. 200 lakh will be provided and for medium service centre, the investment in equipment would be Rs. 500 lakh.

Gaurav Marya, Chairman, Franchise India says, "At Franchise India, our vision has always been to make the entry into and the sustenance of the franchising ventures easy and hassle-free, especially for small businesses. We hope that the tie-up with SIDBI will make this segment even more attractive with solid financing and products for entrepreneurs to rely on."

Lenders/Angel Investors/Venture Capitalists/Private Equity

Besides banks, franchisees can also put forth their loan requests to a group of lenders. They can look for angel investors (individuals, often successful business people, who invest their own personal funds into a potentially rewarding business opportunity) as well.

Franchisors can explore the option of venture capitalists, which are firms or companies that raise money by offering investors a chance to take part in a fund that is then used to buy shares in a private company, also. Private equity, which simply means shares or securities in a company that is not listed on the stock market, can also be looked at.

But make sure you have a well crafted plan to give lenders a reason for investing in your business. The repayment time and the payment of interest also need to be adhered to.

Soft Loans

Soft loans refer to the money given either by friends, family or relatives. In such an arrangement, there is no specific repayment period and no compulsion to pay the interest at fixed intervals. Also in case the business fails, there may be no liability of paying the money back. But at times such an arrangement can ruin relationships. This must be kept in mind while accepting money in such a deal.

Partnership franchise

Finding a business partner is an easy option for many soon-to-be business owners. It will help you procure funds as there are many people who would want to invest money and receive a percentage of the profits but would want to remain a ‘sleeping partner’ in the franchise business.

No matter which form of financial assistance you opt for, it is always advised to study its pros and cons before choosing it. Don’t hurry, as the success of your entrepreneurial dream largely depends on what’s fuelling it and how.

Related: Determination Ensures Franchise Success

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