ChaPter 10: FinanCinG your FranChise in a Post-Covid worLd

ChaPter 10

FinAnCinG your FrAnCHise in A Post-Covid worLd

Phil Chaplin | Ceo CAShFLOw IT GROuP

About the Author

Phil Chaplin is the Chief Executive Officer of Cashflow It Group, a specialist finance company servicing Australia’s franchise, accommodation, and fitness sectors as well as small businesses more broadly. He has over 20 years’ experience in providing finance to businesses across Australia and New Zealand and has managed finance companies in the private and banking sectors. Phil is a former chair of the Equipment Finance division for the Australian Finance Industry Association and has been called on to provide insight and input into government policy, industry education, and to international players seeking to enter the Australian finance sector.

In early 2020 the Covid-19 coronavirus brought a raft of changes to the business world, both internationally and to Australia specifically. Dealing with lock-downs, learning to pivot, the concept of being ‘pandemic proof’. All these things are now considerations not just for those considering opening or expanding their business, but also to those that provide business finance.

It is clear that things may never be quite the same again, and returning to something close to normal, particularly in the context of international travel, may still be some time off. But that does not mean the world has stopped, far from it.

Are financiers still lending to the franchise sector?

The short answer is yes, but you may have to look a little further afield and work a little harder to get the funding you need. In its report on The Covid-19 Outbreak and Access to Small Business Finance the Reserve Bank of Australia said “The COVID-19 pandemic has adversely affected the business sector. Overall, small businesses have been disproportionately affected because they are more likely to be in industries that have been harder hit by the pandemic.”

Most franchises certainly fall into the category of Small Business and lending to new businesses particularly has always been a niche market, with the major players typically shying away from what they consider to be the danger zone (the first two years in the life of any new business venture). This is where non-bank lenders tend to play, often combining their own funds with wholesale funding sources to support the risk that new businesses pose.

What we are seeing from some of the larger players is a much longer turnaround on lending decisions, with big banks often taking weeks (or even months in some cases) to determine whether or not to issue a loan. It’s clear that there have been adjustments to how lenders view the risks associated with any business, and particularly certain types of business, in a post-covid world.

Does my business need to be pandemic proof?

Not necessarily. It is hard to define what pandemic proof means, but obviously some industries and business types are more impacted by measures such as social distancing and lock-downs than others. So far grocery and essential goods suppliers are the only businesses that have shown any real immunity to the impacts of lock-downs, with online goods supply businesses coming in close behind. In the hospitality sector those businesses that can easily supply take-away food and that don’t rely heavily on foot traffic have also weathered the storm better than most.

It is important to note however that lenders tend to think more about their overall portfolio than individual businesses when making macro decisions (such as whether or not to lend to a particular sector). This means that lenders may seek to lend across a wider variety of industries and geographies to help distribute and dilute their risk.

Even segments that might on their face appear to be of comparatively higher risk, such as fitness which often requires people to come together indoors in groups, can still be very attractive to some lenders as long as it forms part of a balanced portfolio.

have lenders changed how much they will lend?

Most lenders want to see borrowers have some ‘skin in the game’ when it comes to their business venture, so few will lend the full price of establishing a new business. Lenders tend to talk in terms of Loan to Value Ration (LVR), how much have they loaned vs. the value of whatever secures their loan whether that is individual assets or the business overall. LVR’s can range from 50% to 100% depending on a variety of factors, but 70% to 80% is more common. As a general rule the banks will want the security of a lower LVR whereas a non-bank lender may be comfortable at the higher end of the scale.

Each lender is different, but most would prefer to fund against what they see as the realisable assets of the business (as opposed to intangible costs such as franchise fees). Historically lenders have tended to consider their fall-back position in the context of ‘What if it all goes wrong?’ (so when a business is forced to close permanently). Now we are seeing more lenders give greater consideration to things like the amount of working capital in the business, or how many weeks a business could survive a suspension in trading without outside assistance. All-in-all whilst some lenders may still advance the majority of the setup or acquisition costs for a new franchise, they do generally expect to see a little more held in reserve for a rainy day.

Do I need to own my own home to borrow money?

The RBA estimates around half of all SME loans are secured by residential property, but that doesn’t mean that all lenders will require that you own your own home before you can borrow money to start a business. There is little doubt though that most lenders will look more favourably at borrowers that demonstrate stability, particularly through home ownership. Some will even want to see significant equity in the property, but we are starting to see more acceptance of people choosing to invest in a business before they buy property (particularly with the price of property in the major metropolitan cities), which is something that has traditionally been more common in many northern hemisphere countries.

What do i need to do to get approved for finance?

Each lender will have different criteria for individual business types and finance products. So whilst it’s impossible to give an answer that applies to every circumstance every time there are some common aspects to applying for and obtaining finance that are pretty universal…

Put your best foot forward

Going in unprepared can lead to a declined application, and turning a declined application into an approval can be very hard work indeed. Even if you end up taking

your deal to another lender they will generally see the previous enquiries and they’ll be asking themselves ‘What’s wrong with this? Why didn’t Lender XYZ approve the deal?’. It pays then to make sure you put your best foot forward and try to get it right the first time.

know your numbers

If you’re at the stage where you’re actually applying for finance, then it pays to have done some groundwork. As they say on Shark Tank “know your numbers”. You should have a very clear picture of your setup costs, everything from your franchise fee to insurance and stock. Make sure you can also show where the money is coming from to get up and running. It will be a combination of your own funds and the amount you’ve borrowed, but don’t forget to include things like landlord contributions to fitout and grants.

It is also important to know the timing of when money is expected to both come in and go out. Do suppliers need deposits? Will the financier advance funds before goods are delivered? Does that landlord rebate get paid 3 months’ in? You want to be able to show the financier that you understand your cashflow and that you are not going to get caught short.

help the lender to understand who you are

Lenders are looking at large numbers of applications every day. The more they have to dig into yours to figure out who you are and why you’re embarking on this business venture, the longer it will take them to make a decision (and your chances of a favourable outcome are reduced). If your new venture is intended to be a passive investment, then say so. If you are planning to work in the business day-to-day then say so.

Many franchise systems provide comprehensive training as part of their system, but a lender wants to know why you are a good fit for this franchise. It will not help you to go on and on about your years of experience washing dogs for the local pound when you are wanting finance for a new fast-food outlet. That assistant manager role you had at McDonalds in your early 20’s however better make it on to your summary of experience.

Shop around (without shopping around)

When it comes to obtaining credit your credit history can be negatively impacted by having a large number of recent enquiries on file. For this reason it’s important not to take your business to every lender in town (or let your broker do so on your behalf). If you’re working with a finance broker then they should already have a clear idea of who your most likely funding options are by the time you’ve finished explaining your situation and business plans to them. If you are going directly to a finance company then it pays to talk to others about who to use. Talk to your franchisor, other franchise operators in the group, or look for a lender that specialises in the sector to minimise the impact to your credit score and maximise your chances of approval.

be honest

Car dealerships used to use a common trick to help customers get finance. They would increase the price of the car they were selling and the value of any customer deposit / trade-in until it passed the tests of the finance company. We truly hope those days are gone, and nothing makes a lender slam the coffers shut faster than porkpies on a credit application. If your broker suggests a few ‘white lies’ be very wary, they may come back to haunt you.

It can be very tempting to ‘overestimate’ the value of your house or other assets, or to ‘forget’ to put down that personal loan or credit card on your liabilities. Modern lending assessments draw information from a wide variety of sources and quickly match it all up, smart software highlights discrepancies and puts it up in lights for the lender to see.

Nobody expects perfection, either in an application or an applicant, you are far more likely to get an approval if you have been honest about that old dispute with your telco, or the business partnership that didn’t work out. Remember too that if the lender finds out something material has been omitted from an application even after they’ve issued an approval, they can usually withdraw that approval without notice.

be persistent

Applying for finance can seem initially daunting, will at times be disheartening, and occasionally it might just feel disastrous… just like running a small business. As well as all of the bits of ‘data’, what the lender really wants to know is that you are serious and committed to your new venture, that you’ll hang on through thick and thin, and that giving up just isn’t in your nature. If you get the opportunity to talk to the lender directly then do it. Give the lender a taste of the passion that you’ll bring to your new business and you might just be surprised by how much that lender is willing to support you on your journey.

PhIl ChAPlIn | Ceo Cashflow It Group

www.cashflowit.com.au www.franchisefinanceaustralia.com.au