Funding is critical for any start-up and access to finance is a key enabler of business expansion. The franchise business model, which is targeted at scaling businesses, must go hand-in-hand with the appropriate funding. Most franchisors look for the financial capability of a prospective franchisee before awarding them the franchise and this fact, on its own, is an indicator of how difficult it is for a potential franchisee to obtain a loan. Banks/ financial institutions do not tend to treat franchisees as a separate customer segment but include them in the broader MSME segment.
Some banks/ financial institutions have come up with innovative financial solutions to these issues and further innovation is required in regard. It is also important that there is adequate support from the franchising environment, including franchisors and industry associations, to make this industry a success. Based on the understanding and appreciation that a franchise business is pre-tested and proven with limited chances of failure, most financial institutions agree that franchise businesses are a better risk to lend money to start or expand their businesses. The private equity and angel investor firms are more accommodating with less funding eligibility criteria, due to their more participatory and supportive funding model. While the commercial and microfinance banks require some form of security to guarantee their lending, they are more disposed to partnerships with intervention funds they can on-lend.
For example, an opportunity was secured for a leading commercial bank in Nigeria to use the GEMS4 matching fund to develop a franchise-lending proposition in 2013. The bank was not able to take advantage of the fund due to the limited franchise concept knowledge within the bank. However, in today’s climate of available industry information, this donor fund could be repackaged and reintroduced to a wider scope of financial institutions beyond the commercial banks.
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