Grant Thornton New Zealand
A FINANCIAL LIFT
could take franchising to the next level

Following the Global Financial Crisis and subsequent tightening by the banking fraternity, is it now time for the Government to follow the leads of other countries and put in place enterprise-type schemes that will help grow the franchise sector?

The recent Franchising New Zealand 2010 Survey identified that 80,400 people are employed in the franchise sector, that it has 423 business format franchisors and around 450 franchise brands. The Survey found that franchising is a profitable and growing sector, but that it is being held back by two things: an inability to attract suitable franchisees and a lack of funding for the initial purchase.

These issues are linked. Many people do not look at buying a franchise because they do not have the necessary money for entry, while others that do look seriously are not able to secure the necessary bank loan.

Shane Blackwell, National Franchise Manager of Cash Converters, told me that tough lending requirements can make it difficult to expand the business. ‘We are expecting to grow the network over the next two-to-three years but any lack of funding or quality franchisees will stall business growth. When a franchisee is indebted, the access to working capital can be difficult.’

Garry Croft, from Muffin Break, is concerned that the calibre of franchisees able to get finance is decreasing. ‘Unfortunately, the young ones with the energy often do not have the funding.’ Influenced by the difficulty in raising capital, Josef Roberts from Burger Fuel says they have recently been concentrating on introducing better systems and improving margins rather than increasing the number of franchisees.

That is good news for existing franchisees, of course, as the GFC has affected profitability even in the best systems. However, for the franchisor, consolidating and making better use of resources is really only a short-term step. For the franchise sector to grow, it needs better access to capital, which in turn will open up the industry to a much wider reservoir of talent.

How To Solve The Problem

One only needs to look at the type of schemes that are in place to assist the small business sector in other countries to understand what is possible here. The United States, Canada, the United Kingdom, India and Germany (to name but a few) all offer assistance to help SMEs (small medium enterprises) get established, and franchises not only qualify for these schemes but are often among the most successful beneficiaries.

One of the best examples – and one that could be easily copied in New Zealand – is the United Kingdom’s Enterprise Finance Guarantee (EFG) scheme. This is a targeted measure intended to facilitate additional commercial lending to viable SMEs unable to obtain a normal commercial loan due to having insufficient or no security. EFG facilitates lending that would not otherwise be available by providing lenders with a partial guarantee.

Decisions on the use of EFG, eligibility, and lending terms in individual cases rest with the lender. There is no automatic entitlement to receive a guaranteed loan and nor is there any pre-qualification process for it. Any loan application will first be assessed via the lender’s own commercial criteria before any consideration of the EFG eligibility criteria.

The loan facilities, which are varied, may be used under EFG and are usually repayable over terms between three months and ten years. They may include:

- New term loans (unsecured or partially secure)

- Refinancing of existing term loans

- Conversion of an existing overdraft into a term loan

- Invoice finance guarantee (available for terms up to three years)

- Overdraft guarantee (available for terms up to two years)

A premium (equivalent to two per cent per annum) is payable to the relevant Government department, in addition to regular capital and interest payments to the lender, and any arrangement fee which they may charge. It is not an insurance premium.

Lenders are allowed to require personal guarantee and/or security where available (except the borrower’s principal private residence) in line with their standard normal commercial lending practices.

EFG is intended to support lending to viable businesses that can ultimately repay the loan in full. The Government guarantee is a guarantee to the lender. Neither the guarantee nor the premium provides insurance for the borrower in the event of default. The borrower remains fully liable in the event of default.

Worth Investing In

Cash Converters’ Shane Blackwell says that in New Zealand there can be people with sufficient funding but not necessarily the skills required. ‘We are focused on doing our due diligence on the individuals to ensure there is a good fit. But the issue remains: there are too few with the skills and the access to finance.’

That’s why it’s important for the Government to consider following the lead of other countries which provide mechanisms to enable good people to get into business. Surveys have shown how successful franchising is in New Zealand, and how important to the economy. If our Government were to provide a scheme like that available in the United Kingdom, the people with the right skills would have access to the necessary capital. That’s a much better fit than the other way round – and something worth investing in.

This advertorial is taken from Franchise New Zealand magazine Volume 20 Issue 2 

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