How to secure funding for a franchise

Starting a franchise in South Africa presents an exciting business opportunity, offering a proven business model, brand recognition, and ongoing support. However, one of the significant hurdles prospective franchisees face is securing the necessary funding. Most franchises require a 50% deposit, which cannot be bonded or borrowed. This leaves entrepreneurs wondering how to secure the other 50%. In this guide, we will explore how franchise funding works in South Africa and offer practical advice on comparing funding options, particularly using platforms like FundingHub.

Understanding Franchise Funding

Franchise funding involves securing capital to cover various startup costs, including franchise fees, equipment, inventory, and working capital. The total investment needed depends on the specific franchise, but it often ranges from hundreds of thousands to millions of rands.

The 50% Deposit Requirement:

Franchisors typically require a 50% deposit that must come from the franchisee’s own resources. This requirement ensures that the franchisee has a significant financial stake in the business, reducing the risk for the franchisor. The remaining 50% can be financed through various means.

Sources of Funding for the Remaining 50%

Here are some common sources of funding to cover the remaining 50% of the franchise cost:

1. Loans: can be sourced from traditional banks or alternative lenders. These institutions offer various loan products, including term loans and revolving credit facilities. They will typically require a solid business plan, good credit history, and some form of collateral. Platforms like FundingHub can be used to compare offers from various lenders, where you can choose the funding type suited to your needs as well.
2. Private Investors: Seeking out private investors or venture capital can be an option, though it often involves giving up a share of ownership. Angel investors can be particularly beneficial if they bring additional expertise and networks to the table.
3. Equity Financing: This involves selling shares of your business to raise capital. It’s a viable option for businesses willing to share ownership in exchange for funds.
4. Savings and Personal Assets: While not always ideal, using personal savings or liquidating personal assets can provide the necessary funds. This demonstrates to lenders your commitment to the business.

Steps to Secure Franchise Funding

1. Prepare a Detailed Business Plan: A comprehensive business plan is crucial. It should include market analysis, detailed financial projections, a marketing plan, and an overview of your management team. This plan will be essential when approaching lenders or investors.
2. Calculate Total Investment: Determine the total cost of starting the franchise, including initial fees, setup costs, working capital, and any other expenses. This calculation helps in understanding how much funding is required.
3. Assess Your Financial Position: Evaluate your financial standing to understand how much you can contribute towards the 50% deposit. This includes reviewing your savings, liquid assets, and potential for raising personal funds.
4. Research Funding Options: Investigate the various funding sources available to you. Consider the pros and cons of each, including interest rates, repayment terms, and the impact on your business ownership.
5. Prepare Documentation: Gather all necessary documents, such as your business plan, financial statements, tax returns, and any other documentation required by potential lenders or investors. Here is a list of documentation most lenders will require:
   • Written confirmation from the franchisor that you have been approved as a franchisee.
   • A copy of your ID.
   • Your personal balance sheet, showing your assets and liabilities.
   • Information relating to your background, similar to a CV.
   • Proof of the origin of your unencumbered deposit.
   • A comprehensive business plan.
   • A copy of the lease agreement.
   • A copy of the franchise agreement.
   • A copy of the signed agreement of sale, stipulating the conditions of sale.
   • A breakdown of equipment to be financed, including rand value per article.
   • Applicable CIPRO registration certificates.
   • Signed financial statements and a 12-month cash flow projection. If the financial statements are older than six months, up-to-date management accounts will be required.
   • Six-months’ bank statements of the business trading account.
6. Apply for Funding: Start the application process for your chosen funding sources. Be prepared to present your business plan and answer any questions regarding your business and financial projections.
7. Negotiate Terms: Once you receive offers, compare the terms carefully. Look at interest rates, repayment schedules, and any additional fees or covenants. Negotiating favorable terms can significantly impact your business's financial health.

Using FundingHub to Compare Funding Offers

FundingHub is an invaluable resource for South African business owners looking to secure funding. It simplifies the process of comparing various funding options by providing a platform where you can access multiple lenders and financial products in one place.

Benefits of Using FundingHub:

1. Wide Range of Options: FundingHub connects you with a broad spectrum of lenders, including banks, alternative finance providers, and government institutions. This variety increases your chances of finding the best fit for your needs.
2. Time-Saving: Instead of approaching each lender individually, FundingHub allows you to submit a single application that reaches multiple lenders. This saves time and effort.
3. Transparent Comparison: The platform provides a transparent comparison of different funding options, including interest rates, fees, and repayment terms. This transparency helps you make informed decisions.
4. Expert Guidance: FundingHub offers access to financial experts who can provide advice and support throughout the funding process. Their expertise can be invaluable, especially if you are navigating business financing for the first time.
5. Ease of Use: The user-friendly interface of FundingHub makes it easy to use, even for those who are not tech-savvy. The platform guides you through the process step by step.

How to Use FundingHub:

1. Register on the Platform: Start by registering on the FundingHub website. Create a profile and provide basic information about your business and funding needs.
2. Submit Your Application: Complete a single application form detailing your financial requirements, business plan, and relevant documentation. FundingHub will distribute this application to multiple lenders.
3. Compare Offers: Once the lenders review your application, you will receive various offers. FundingHub allows you to compare these offers side by side, looking at interest rates, repayment terms, and any other relevant details.
4. Select the Best Option: Choose the funding offer that best suits your business needs. Consider the long-term impact on your cash flow and business operations.
5. Finalise the Funding: After selecting an offer, complete the necessary paperwork and finalize the funding process. FundingHub’s support team can assist with any questions or concerns during this stage.

Securing funding for a franchise in South Africa is a challenging but achievable goal. By understanding the funding landscape, preparing diligently, and utilizing resources like FundingHub, you can navigate the process effectively. A strategic approach to securing the required capital can set the foundation for a successful franchise, enabling you to leverage a proven business model and achieve your entrepreneurial dreams.