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Franchise sector embraces fintech funding

Franchises have a legacy of growth even when the going gets tough

Article provided by Merchant Capital

New franchise concepts are springing up all over the country in a flourish of innovation and entrepreneurship that goes hand in hand with the search for new opportunity and reinvention in a challenging economy.

Franchising has become a substantial contributor to South Africa’s economy; combined sales of franchised networks are estimated to exceed a whopping R700-billion per annum. With corporate retrenchments and early retirement packages on the rise, South Africans – inherently industrial by nature – are looking for new income generators. Franchise growth has a legacy of maintaining itself quite substantially, even through periods of near-recession, with annual growth rates hovering consistently around 25%.

‘The fact that franchises have traditionally done well is understandably attractive to those wanting to invest in a new business,’ says Ryan Cohen of Merchant Capital. ‘Innovation, flexibility and bringing in fresh ideas has seen the franchise sector embracing alternatives, and with this expansion, comes the need for working capital.’

As an alternative funder, Merchant Capital itself experienced 150% growth in new customers in 2018 alone and has provided funding to 5000 merchants to the tune of R1-billion over the last six years. Nearly 30% of Merchant Capital’s current portfolio comprises franchise business, primarily in fast food and restaurants, hair and beauty, hardware, and automotive sectors.

Alternative shifts to mainstream

‘We have seen a shift as alternative fintech funding starts to move into the mainstream, while the need for franchisees and franchise owners to find secure funding partners grows,’ says Cohen. It is often the company that fintechs keep that give SMEs the confidence in the credibility of this new form of funding. ‘We caught the attention of Standard Bank with the innovation behind our funding model and in 2018, signed a strategic equity partnership with them,’ says Cohen. The deal was transformational in the South African financial services sector as it was the first time an incumbent bank had invested into a fintech funder to the benefit of its client base.

South Africa is known for its robust and innovative franchise sector with an impressive leader board of franchise brands that are instantly recognisable far beyond local borders. Well over 80% of homegrown franchise brands dominate the local sector. This is in complete contrast with most countries outside of the USA, where foreign brands tend to dominate the market.

Opportunity and challenge

While the opportunity for franchisees lies in becoming part of a nationally or internationally renowned franchise network, the challenge comes in growing business intake and updating equipment or software while the franchise sector at large grows at a rapid pace. This takes capital, which franchisee owners often don’t have.

Incumbent finance institutions traditionally only offer larger loans; a situation that lands small business owners facing impossible repayments. Support in the form of working capital allows business owners quick and easy access to that one new piece of equipment or that one new set of software that makes all the difference to increasing turnover, growing the business, and keeping within the franchisors contractual stipulations.

When looking to enter the franchise space and ways to secure funding, Merchant Capital advises entrepreneurs consider these points:

#1 Avoid the glint of distraction:

Life as a franchisee is appealing in many ways because it’s often a tried and tested model. ‘Weigh up how much working capital you’ll need, how quickly you’ll require access to it, and how you are going to go about finding the right funder for your business,’ says Cohen. As with any new business, do your homework with due diligence ahead of buying into it. Franchises that are less than three to four years old are seen as ‘new and developing’. If you are considering buying into a new concept, be circumspect about whether the owners have the financials to invest in developing new franchisees within their budding company.

#2 Behaviour check:

Stay ahead of the curve by keeping abreast of global trends. Keep a firm eye on local relevance and track the changes in customer behaviour to adapt to the nuances.

#3 Extra protection:

Explore whether the franchise is part of the Franchise Association of Southern Africa (FASA). Even if a franchise assures a potential franchisee that the company’s documents are compliant with the Consumer Protection Act, the trademarks are registered and a support structure is in place – there is still no onus on the franchise owners to conduct business on an ethical basis. FASA’s members provide a written undertaking that they’ll abide by a Code of Ethics.

There is never a silver bullet to running a successful new business – the best advice is to be diligent, frank with yourself, and calculate your risks.

Merchant Capital is a proud Partner of the NSBC.