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Correct financing for a franchise can heighten chances for successThere are numerous options available to fund a franchise. Careful evaluation and management of these options should see you on the path to commercial success and wealth. Establishing a business requires the investment of a great amount of time, effort and money. Most potential franchise owners do not have the capital needed to launch and run an enterprise effectively, and therefore rely on borrowing. ![]() Image: www.freedigitalphotos.net "For many, the opportunity to launch a business is created by a pension or provident fund payment or, very commonly, from retrenchment cheques when leaving the corporate world," said Ethel Nyembe, Head of Small Enterprises of Standard Bank. "There are, however, other, more conventional ways of finding finance." Below, Nyembe suggests and explains the more established methods of funding a commercial enterprise, and which approaches to avoid. Friends and family"Many potential franchise owners turn to family and friends for finance," said Nyembe. "This is one of the most common forms of financing a business, but should be undertaken with caution. Family relationships can be tested, and even destroyed, if the undertaking does not thrive as planned. Even though franchises have a much higher success rate than start-up SMEs, there is no guarantee that they will prosper." Two factors should be considered when approaching family or friends for loans: A business partnerFinding a business partner to invest in the franchise and take a stake in its future is a viable financing alternative. "A partner should share your values, passion and determination to make the franchise succeed," said Nyembe. "All aspects of the partnership agreement, share allocation and profit sharing should be placed in contractual form, so that future misunderstandings do not occur." Loans Financing a franchise through debt equity (a business loan) is often the best option, as there are a few valuable advantages: Although banks are in the business of lending money, the potential franchisee must understand that they are also concerned with minimising risk. When approaching a bank for funding, Nyembe said, you must realise: Said Nyembe: "The advantage of bank loans is that repayment terms and interest rates are agreed upon up front. This helps to regulate cash flow, as the repayments will be calculated on a monthly basis for the period of the loan." There are also several methods of financing that should be avoided when seeking funding, cautions Nyembe. These include: "Starting a franchise operation with massive debt hanging over you is not advisable," said Nyembe. "If the franchise outlet is new, it could take several months before the business is established and the turnover is able to finance operations and costs. It is during this period that you and your business will be most vulnerable to financial failure. "Avoiding this means doing your homework, knowing exactly how much money you will need and then financing it in a responsible manner." |