Do Business Well

A certain mystique has surrounded banking for centuries and some of it has managed to survive to this day. Considering the fact that we live in a time when old bastions of authority have crumbled and cynicism rules, this is rather surprising, but it is a fact nonetheless. Many people continue to see bankers as creatures with almost supernatural powers, in a position to decide the fate of a small business at a whim. To them, bankers are the custodians of piles of cash that they will lend only to a select group, with thedecision to grant a loan being based solely on old affiliations and personal preferences.

They tend to overlook the simple fact that in a banker’s hands, cash is practically the same as the merchandise a retailer offers for sale. Bankers accept money from depositors who expect to receive interest. They in turn lend this money out to borrowers whom they charge interest, obviously at a higher level, and the differential between the two interest rates enables them to generate profits for their shareholders. Although this may be an oversimplification, it illustrates the point that bankers are practically forced to lend out money. If they fail to do that and keep the money in their vaults instead, they will soon go out of business.

The banker’s desire to lend out money is counterbalanced by his obligation to ensure that over time, the money is paid back with interest. The traditional way of protecting the bank against losses arising from bad debt has been to have loans secured by assets that would exceed the value of the outstanding loan and can easily be realised. It follows that until recently, unless you were able to tap informal sources of finance, your request for a loan would have been met with a request to provide security or collateral.

Essentially this has not changed but indications are that there is some light at the end of the tunnel at last. Whilst for traditional bankers, the only acceptable forms of collateral were hard assets such as blue chip investments and fixed property, forward-looking bankers are increasingly beginning to treat the inherent potential of an entrepreneur, and the promise that is contained in his business plan, as a form of collateral. And better things are yet to come!

The banker’s attitude towards franchising

When compared to their counterparts around the world, South Africa’s franchise fraternity is fortunate in the sense that when it comes to franchising, local bankers rank among the most progressive in the world. By and large, they understand franchising and embrace it with gusto. Exceptions continue to exist, however, and they will be discussed in a subsequent paragraph.

The rationale behind bankers‘ enthusiasm for franchising is not hard to find. Instead of being exposed to the ramblings of a wild-eyed entrepreneur without track record whose business idea may or may not work, the banker is presented with a loan proposal that is not only professionally prepared, it is also underpinned by the reputation of the franchisor. Although the franchisor will ordinarily not sign surety for a franchisee, just by accepting the franchisee into his network he has already demonstrated his confidence.

The fact that, far from being an unproven start-up, the new venture will operate under the name of the franchise network, using its proven techniques and enjoying ongoing support by a team of seasoned professionals, will do much to further reassure the banker. As a result, even proposals that may have been considered unsound by yesteryear’s bankers, suddenly become bankable to an enlightened banker.

To the layperson, all banks may appear to be the same - same advertising - same approach to lending - same products - same level of service. Well, as far as franchising goes, nothing could be further from the truth. Whilst it would be true to say that all leading banks are familiar with franchising, we would like to think that, based on the potential franchising holds, banks should go the proverbial extra mile in an attempt to maximise lending to this sector. To date, at least one of South Africa’s leading banks has taken up this challenge, and others may well follow. This is why “shopping around” is highly recommended.

What your bank should do for you

Ideally, your bank should operate a dedicated programme for the franchise sector. To begin with, this would entail that the bank has franchise expertise on tap, not just at Head Office level but throughout the regions so that you can conveniently access it. This is important, especially if you are a prospective franchisee and require guidance in selecting the correct franchise, and how you should go about financing it.

The bank should operate a specific programme for franchisors. Starting at the foundations, such a programme would revolve around close cooperation with carefully selected franchisors. To be admitted, franchisors would have to provide the bank with comprehensive information on their franchise package, including details of their franchisee support infrastructure.

Having satisfied itself of a franchisor’s bona fides including his track record, the fairness of the franchise agreement, the extent of initial and ongoing franchisee support and the financial viability of the franchise, the bank should then enter into a formal cooperation agreement with the franchisor. To be meaningful, such an arrangement should offer a series of benefits to the franchisor and his franchisees, not all of them restricted to financing. To be seen as “franchise friendly”, a bank should offer the following:-

• Initial and ongoing access to franchise information;
• Computerised business plan layouts and cash flow models;
• Creative financing solutions which, in appropriate circumstances, should include an initial loan repayment holiday;
• Dedicated products which should ideally be made available to qualifying franchisors and franchisees at preferential rates;
• A comprehensive range of traditional and electronic banking facilities including credit card merchant services, permitting true and literal one-stop banking;
• Ongoing close cooperation between franchisor, franchisees and the bank’s relationship manager, with the objective to foster a climate of fiscal responsibility;

n Joint implementation of an intensive care programme designed to_il minimise the risk of franchisee failure.

The form reproduced as Figure 10 will help you to locate such a bank.

Reality check

However, even the most modern-thinking banker is unlikely to approve a loan that is not matched by an investment made by the entrepreneur. This contribution should preferably be in cash, from own resources, as the mere fact that the entrepreneur has accumulated some capital indicates his ability to deal with financial matters in a responsible manner. Other reasons for this requirement are:

• If loan capital is the only source of finance, the cost of capital is likely to absorb all the business’s profits, and could even strangle it.
• Unless the entrepreneur has a tangible investment in the business, his commitment could be suspect. With nothing to lose, he could easily decide to lock up the business, hand the banker the keys and walk away.

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