Who gets access to franchise funding in 2019?

By Sarah Stowe | 19 Feb 2019 View comments

The last 12 months have provided a brutal reality check for those brands that had assumed continued finance access for their franchisees, but had not yet addressed fundamental weaknesses in their franchise model.

A sustained adverse media campaign, a protracted Parliamentary Franchising Inquiry, acute concerns around very large loan exposures (at a franchisor level) and reduced business opportunity have all contributed to an overall reduction in traditional accreditations, and fewer frontline franchise lenders.  

The Hayne Royal Commission has already led to more conservative lending practices, fuelled by declining real estate values that underpin much traditional small business lending.

Franchisors have needed to change their approach to maximise the chances of their franchisees accessing finance in 2019.

Before we look at what can be done, let’s cross off three things that don’t work.

These 3 things won't help you get franchise finance

1. Blaming the media

Media coverage that is not effectively defended typically becomes accepted. Credible information that supports sound performance and desirable behaviours is the best way to silence adverse media. Even if you do not respond in the media let your bankers know the true story.

2. Blaming other franchise brands

The fact that other brands have been mentioned in adverse media coverage usually has no impact on experienced bankers unless allegations are made of industry wide conduct. Lenders make their own decisions on who they lend to, franchising or otherwise. Every brand owns their own reputation, performance and lender risk profile. However if you are silent your financier could assume you are beset by the same problems being experienced by other brands.   

3. Blaming lenders

Many franchise systems express frustration at the lack of support from lenders (particularly the major banks). They often feel lenders do not understand, or respect the strength of their franchise system.  

That may be true, but on the flip side lenders often feel the franchisors don’t understand:

  • their business, and what they need to know to have confidence to lend;
  • what the lender needs to know up front about the business;
  • what average (not to be confused with mediocre) performance looks like;
  • what they are looking for during the relationship; and
  • most importantly, what they can expect if a franchisee is performing below expectations.

So how do you improve access to franchise funding in 2019?

1. Take control

We predict bank accreditations will soon be a thing of the past, as they carry too much risk for banks in the post-Hayne era. In 2018 there was a major reduction in accredited franchise systems, and one major bank is currently being sued in a franchisee class action based on an allegation that the bank misled the franchisees by accrediting a franchise system.   

Rather than trying to convince banks to accredit you, or risking inaccuracies or omissions in communicating the strength of your brand, create your own portable bank report.  

If written in a language and format that lenders understand and trust this will promote your transparency, position your brand as finance ready and promote improved finance access for your franchisees. It will also help open up access to emerging and non-traditional finance channels.

2. Be positive

Be proud of your brand and proud of the contribution that franchising makes to the Australian economy and our communities. Banks themselves have endured adverse media for longer than the franchise sector has and are also looking for positives. Give them some. Share the success of your franchisees and recognise individual lenders that have been partners in those small businesses.

3. Be lender friendly

Try asking lenders what you can do to make it easier for them to support your franchisees rather than what do you need to do to become accredited. This is especially important with traditional accreditations now effectively yesterday’s hero and suggests a partnership rather than a self-serving intent.

4. Provide better information

Don’t focus on how many units you have or are opening. Instead show lenders how you are positioned for success, how the existing businesses are tracking, how you help underperforming franchisees and point to real life examples to back that up.  

Too many franchise systems fear giving banks information, when in fact banks are usually delighted to receive any information you choose to provide.

5. Find a Registered Franchise Lending Specialist

In 2018 almost 50 lenders achieved the status of Registered Franchise Lending Specialist. These are the lenders that are committed to high standards of professional excellence and most importantly committed to supporting the franchise sector.

How to get a yes for franchise funding

With fewer bank accreditations apparent, at least for now, the majority of transactions will be assessed on a case by case basis.

Transparency (highlighted on The Australian Franchise Registry) and the availability of independent and objective information for lenders will go a long way to getting the right answer to that question by focussing on tomorrow’s opportunities rather than yesterday’s events.

Find expert advisors who can help with your business development here.