FUNDING FUNDAMENTALS

Part 1: Introduction

By Kobus Oosthuizen

SA Franchise Warehouse

Over the course of 13 articles, SA Franchise Warehouse will, in layman’s terms, present a series on funding of small and franchised businesses in South Africa. Our primary objective is to explain the fundamentals and principles of small business lending and how franchise funders in South Africa apply these principles.

The articles are compiled by Kobus Oosthuizen, head of Franchise Finance, a franchisee loan origination agency, which facilitates loans with most of the franchise money lenders in South Africa.

Funding is not a topic which can be covered in a single article. There is simply too much information, the details of which cannot be condensed into a couple of pages. To allow our readers to gain maximum benefit from the information, it will be presented in a short, course-like format.

It is necessary that both franchisees and franchisors understand the typical conditions attached to the value propositions of the various funding institutions. Being informed and educated regarding possible funding pitfalls may prevent situations where funding complications interferes with, or even derails, the establishment of a franchise. How often has the establishment of a franchise commenced, only to discover that the proceeds from the franchisee’s pension fund payout is required before the bank will payout the approved loan? Most often pension fund payouts only occur 60 days after resignation.

Often, obtaining the loan is the sole objective and the conditions attached thereto are considered secondary. First time franchisees or business owners may find themselves caught up in fantasies about all the money they are going to make, and the possibility of not being able to meet overheads and loan repayments has not even crossed their minds.

In Part 2 we introduce the first of the lending principles applied by funders, as it relates to franchising. We look at how it affects the lender’s decision to grant a loan and the conditions that accompany such an approval.

The first principle is the assessment of the business system of the franchisor. The balance of the lending principles, as it applies to franchising, will be unpacked in parts 3 to 6, when we look at the aspects of the franchisor’s business that are of interest to the banks and how they impact the rating granted to a franchised brand.

Part 3 deals with the issue of own cash contribution and how it affects the merit of an application and the future profitability of a business. When considering funding options, the matter of own contribution is often the first and only factor considered by applicants. While the lender with the lowest own contribution requirements is considered most favourable, this should not necessarily be the gauge.

Part 4 covers the topic of security. We discuss the various types of security, the value placed on such security by the various funding institutions and how the availability of security impacts the conditions attached to a loan.

Part 5 deals with affordability and how lenders assess affordability. Affordability is the perceived ability of a business to repay a loan. The financial projections contained in the business plan, together with the historical information supplied by the franchisor, are the key supporting documents in this instance.

In parts 6 to 8 we look at how the funding groups, i.e. commercial banks, development funders and private lenders, and their lending policies differ from one another. As each of the funding groups apply the principles of funding, covered in parts 3 to 5, differently, it impacts on the conditions that accompany a loan.

Part 9 deals with the detail of a typical application, specifically the information required and why such information is required. Being unaware of the essential nature of information that may cause an application to be aborted can have dire consequences.

Parts 10 & 11 address the impact and relevance of a lease agreement on funding applications and how the rights and obligations of a landlord influence funding considerations. The right to occupy premises and the conditions attached to that right is a key assumption with most franchised business plans. Rental rates, duration and escalation conditions must be discounted in the projected cash flow and in the business plan.

Part 12 covers implementation of finance agreements and factors generally impacting on the efficiency of the process. Implementation can be hampered by the seemingly negligible policy and procedural issues insisted on by the funding institution. Being knowledgeable regarding possible pitfalls is beneficial from a cash flow planning point of view for both franchisee and franchisor.

In Part 13 we take a look at what to do when, despite your best efforts and planning, the business does not perform as projected and you find yourself in the position of not being able to meet your monthly obligations.

Through each of the following 12 articles, we will offer useful tips and recommendations which may increase the efficiency of the funding process.□

Kobus Oosthuizen, after having qualified as a Chartered Accountant in 1992, became of King Pie’s first franchisees. In 1996 he co-founded and managed the Butterfield brand until 2005 when it boasted 120 franchised bakery outlets and also received FASA’s Franchisor of the Year award. Kobus served as the Chairman of FASA until 2009 and founded SA Franchise Warehouse thereafter.
http://www.safw.co.za/