According to the latest Franchising Confidence Index, one of the major factors holding back growth in New Zealand at the moment is the availability of finance for new franchisees. Some existing franchisees also report that they have had problems attracting funding for expansion or refurbishments. In other countries, though, government programmes are in place that encourage banks to take a different approach to lending. Last year, we reported on the Small Business Administration scheme which makes and guarantees loans to businesses in the US. Now we’ve been talking to a leading British franchisor about the UK’s Enterprise Finance Guarantee scheme.

Under the EFG scheme, participating banks can lend up to a maximum of £1 million to eligible UK companies trading less than five years with a turnover of less than £25 million. What makes it attractive to the banks is that in the event of default, 75% of the loss will be met by the Government. Loans under the scheme are available to small business in general, including franchises, and can be used to provide working capital or fund expansion or capital expenditure. Other purposes such as acquisition/purchase of businesses, land/property purchase, and start-up costs are also permitted.

David Corbett is a fan of the scheme. David is co-founder of the Signs Express franchise, which has over 80 outlets throughout the UK, and is also a board member of the British Franchise Association and chairman of the European Franchise Federation.

David, you’ve been in New Zealand on holiday for a few months but I know you haven’t been able to keep away from the franchise fraternity here and you have heard some of the concerns about funding for new franchisees. Is funding an issue there too?

I think the UK has been hit worse by the recession than New Zealand, to be honest, and certainly some of our banks have taken a hit. At Signs Express we have a good track record and we’re still able to access funding but there are lots of stories around about other companies not being available to find funding at all. Even for us it does appear to be a slower process. It’s no use pretending that things are easy; you have to have a good case to get funding at the moment. We’ve done one very large resale recently which took longer than would have been the case before. There was more, I’m tempted to say, due diligence by the bank to make sure that the business plan was achievable and I think they are looking at business plans a lot more carefully now.

Has the Enterprise Guarantee Scheme been set up in response to the economic crisis to help small businesses raise the funding they need, or was it in place before?

It’s not really new. In the UK, we’ve had something called the Small Firms Loan Guarantee scheme since 1981 which assisted people who did not have sufficient security for a bank loan. That was replaced in 2009 by a similar programme called the Enterprise Finance Guarantee which increased both the amount of lending available and made it available to larger organisations. It also addressed some of the anomalies that had emerged in the original scheme.

Has it helped?

Yes, I think that it has done an extremely good job for small businesses, and franchising in particular now perhaps more than ever. It gets before the banks a number of people who want to start their own business and perhaps have a little money but don’t have the collateral to offer the bank.  The scheme gives the bank the opportunity to lend money to small businesses in general, knowing that some of their risk is taken away. Of course, none of this comes for nothing and the person taking the loan does pay a premium to get the benefit of the scheme ­– I guess you could almost call it an insurance policy premium.

So people pay a little more to get the benefit of the EFG scheme and get access to the funding?

Yes

That’s interesting because you sometimes see franchisors set up their own internal funding programme to help new franchisees but when you start adding in additional repayments or premiums the model won’t always take the extra repayments.

Yes, the model has to be robust. The EFG premium is not a large one, in our case at least, because of our track record. I always have a bit of an intake of breath when I see it but it is manageable.

So you have had personal experience of using the EFG scheme and its predecessor within Signs Express?

Yes, we haven’t used it ourselves as a corporate body but quite a few of our franchisees were funded, at least initially, through the Small Firms Guarantee Loan scheme. I don’t have the figures to hand but I suspect something approaching 30% were done through the scheme. Of course, we would also have applicants coming to us with all the money; they don’t need to go to the bank at all other than to open a bank account. But some very successful franchisees have come though the scheme and even had a second tranche when they’ve been expanding.

A second tranche?  You can come back for more if you need it?

Certainly you have been able to in the past although that regulation may be about to change. It encourages franchisees to grow and even go multi-unit.

In terms of how it works, does the bank say to a new franchisee ‘Yes we’ll lend you money but only on condition that it’s done under the Small Business Guarantee Scheme’ or does the initiative come from the franchisor when they have a suitable candidate?

Well, in our case we are pretty experienced so before the franchisee applies to the bank for the funding we decide whether they’re going to make an application under the guarantee loan scheme. We know whether we want to do that by the background and attributes of any individual. Of course, the Department of Trade & Industry which administers the EFG has to approve each application so it wouldn’t lend if we had a bad track record. Naturally, we don’t put forward people that we think won’t get the funding because it makes it look as though we’re not doing our job properly.

And if somebody defaults under the scheme the bank gets its money back?

The bank gets up to the guaranteed funding, which is 75%. That obviously makes the banks feel a lot more comfortable about lending and makes it possible for us to select from a wider range of possible franchisees.

If there’s a default and the bank gets its 75%, what happens to the franchisee?

They are still responsible to the bank for the 25%, but they don’t have to repay the 75% to the government – that’s what the premium is for.

Given the recent problems of the UK banks, are there critics who suggest that the EFS scheme encourages the banks to lend money and the government to bail out the banks as they have done.

 It’s a perfectly valid criticism, but as far as the franchising industry is concerned, if they get a bad track record they’re probably not going to get their applications through so the government may get caught a couple of times but it is almost self-policing.

Some people would say that such schemes shouldn’t apply to franchises. After all, isn’t it the franchisor’s job to set up a sufficiently robust model that the banks will support it and new franchisees can access funding in the normal way?

That’s perfectly true, but the UK government does want to support small business in general and franchising is a big part of the sector. Almost irrespective of which colour of government is in charge, they appreciate that small business are the backbone of the economy and so therefore there has always been the desire to help small businesses either expand or start. If you look at our own network, we started with 1989 with 2.5 employees and if you now take the whole Signs Express group of 80 stores we employ something like 500-600 people.

David, congratulations on your success and thank you for taking the time this morning to explain more about how the EFG works from a franchisor’s point of view. We look forward to seeing you in New Zealand again next summer.

As Arnold Schwarzenegger said, ‘I’ll be back.’