The co-relation of funding, financing, small business and franchising In India
While we interact with 1000’s of entrepreneurs (franchise seeker) annually seeking new businesses and franchise opportunities, we are often confronted with the question of ‘how to fund the franchise?’ On the Other hand there are business owners (franchisors) who
are looking at expanding their existing business and are seeking additional funds to take it to the next level. I would like to throw more light on how both of these could get the required financial resources and move on with franchising.
With the entrepreneur, during the initial counselling sessions, we understand how much capital one already has (It is important to have initial capital), and based on the feedback; suggest opportunities on the types of business that could be taken up. The options given are based on their profiles and ability to be able to arrange the balance funding. Entrepreneurs quite often end up selecting a franchise they want, but then they don't have enough liquid capital to completely fund the start-up of the business. That’s when they start to think of getting a loan. They start to talk to friends, relatives, banks and the different sources on hand.
Most Small and Medium Sized Business Owners and Franchisees look at the following options to fund their franchisees:
Franchisor Sources: From my experience, I would recommend any franchisee to first seek advice and help from the franchisor. Established Franchisors work with financial institutions to get a pre-approval of sorts, with minimum pre-set criterion for their franchisees. A franchisor with more than 25 successfully operational franchise partners will be more likely to get these approvals than the one’s who are just beginning to franchise. However, as a franchisor, if you have less than 25 franchisees, you could still have the above organized and ensure that you are able to recruit franchisees more effectively, and seek qualitative participation from the entrepreneur. It is always very prudent to be independent of wealthy franchises, who at times, do not bring anything more than just capital, and ask for so much more in return. Infact your franchise strategy, must revolve around getting much more from the franchise, than just their investments. While franchisees fund the initial growth of a lot of franchise business, it’s very important to merge this investment with other things the entrepreneurs bring in. A very relevant example would be the now 4000 Crores annual pre-school business in India, which depends heavily on funding from franchisees, for initial land and infrastructure and at the same time looks at them for managing the teachers and quality of education imparted. The franchisors in this segment have used franchisees very effectively to scale up their businesses very quickly, over the last couple of years and are available in large numbers across every city of the country. Its always very critical to assist your franchisees with the initial funding, because, we’ve seen that you will have a large pool of franchisees willing to put their efforts into the business, once they are supported with the initial investments. We have also seen at times, the franchisors come forward with additional financial help from their own end, when they see that the franchisee profile is very suitable for their business and does not have the complete capital to get started. Hence the franchisors sources must be the first options that you must look for.
Bank Funding and Govt Participation: Since franchising in India does not enjoy an industry status, banks treat franchising at par with business loans. Most banks offer business loans upto the tune of 10 -30 lakhs towards the working capital requirements and for the initial investments in interiors, computers or the infrastructure needed to get started with the business. They would want to understand your background, credit history, and off course will get to your net worth and based on that offer you a loan. They would also ask you for a complete business plan with projections for the franchise (your franchisor will be able to provide you with this), while trying to understand the repayment process and your capability to repay, and at most times, your approvals will be based on personal file and your credit worthiness. Our query to S.B.I. yielded responses of Interest rates varying from 10.75% to 12.5% PA depending upon nature of business and investments. Upto 75% of the working capital requirements are given while the intrest rate becomes lesser in cases where investments are more in interiors or equipments or other start up requisites.
Funding From Friends, Relatives, Society, Chit Funds and Society: In India we have a very peculiar societal way of funding, which is very unique in itself. Lending within communities is very common and there is a fantastic system of low cost or at times no interest loans that these communities provide to its people. The growth of the trading communities within the Gujarati’s & Jain’s is predominantly due to the amazing internal funding system that they follow. There are many other communities that follow their own support system for its fellow people. Hence, it might not be a bad idea to consult with your elders or prominent personalities within your community on what are the services that are offered to start a new business and you will be surprised to see that there are options available, which are generally not known. A lot of chit fund companies also operate in the Indian context offering a monthly or a quarterly payment system against which money is spent to its members for their funding requirements. At times there are daily payment options for very small businesses that require micro-financing, from private financiers, but this is always a very expensive preposition and involves dealing with a lot of unruly elements. It’s always advisable to reach out to that rich relative or a friend for your business loan, provided, you convince them for lower interests and off-course they find you ‘reliable’. At times, people just have this option, if their Income Tax papers are not strong or they don’t have a demonstrable net worth to show to banks or other institutions.
Credit Cards, Collaterals and Personal Loans: Another source of funding that entrepreneur’s use is by offering assets that they have against collaterals. We have gold collateral lending and loans against properties or deposits. Pawn Brokers exist across the length and width of the country to offer you immediate financing against security. Entrepreneurs have also used funding through their credit card limits, something that we strongly advise, against. High interest rate loans, generally set the business start itself on a high cost footing and at most times its seen that non regularity in payments against these loans add to high penalties and costs to the franchisees. This in turn brings in a lot of distractions resulting in poor performances in the day to day functioning of the business and at times the entire profitability goes away in paying the interest and other costs. Hence it’s very important for the franchisee to analyse the total cost of the franchise, include all elements like taxes, working capital and ensure there are no hidden costs, which they might not be able to afford, once they commit to take a franchise. Interest Costs on funding must be added to the business expenses and only then must you evaluate venturing into a business once you are clear of the EBIDT (earnings before interest, depreciation and taxes).Once you get the EBIDT, you calculate the other net outgoings and arrive at the actual profitability after all provisions.
Venture Funding: There are venture funding companies that fund specifically for franchise businesses. Team India Managers Limited, based at Mumbai, specialises in funding entrepreneurs who are keen to take up franchise businesses. A dedicated division ensures that they work closely with entrepreneurs seeking new business opportunities and help them with their funding requirements for specific opportunities. These platforms ensure that the lending company understands the dynamics of the industry and its returns better and are placed comfortably to extend their hands to entrepreneurs seeking funding. This only signals better funding sources for the franchise industry at large and for the common man seeking new opportunities in particular.
I would like to conclude, that it is very important that you choose the right sources of funding to get started with your new business. Whether you are a franchisee or a franchisor, finding the best source that suits your financial requirements is as vital as any other decision that you take on starting and running a business and at times will form the most important catalyst to your success.
Good luck on finding your loan and for the success of your new business.
Amit Nahar is a franchising consultant & the CEO of Sparkleminds Franchise Catalysts.
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Disclaimer: The views expressed here are that of the author and does not represent the magazine's.
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