South Africa’s economy is under significant pressure and, for a number of reasons, there is little promise that this will change in the near future.
In May this year, the International Monetary Fund (IMF) predicted only 1% growth in 2017, up 0.2 percentage points from their previous prediction of 0.8%.
Despite the economic challenges that businesses face, franchising is one sector that has consistently shown its resilience by performing well, says Dumisani Bengu, head of franchising at Absa.
“As a business model, franchising is very resilient because you are buying an established brand that already has a committed following,” he said.
“South Africans are very brand conscious, they like to know it is a stable brand and that they can rely on the quality.”
Bengu indicated that South African banks think the same way, although it isn’t the only factor considered when granting a loan.
“There a many reasons why a franchise model is appealing to a bank,” said Bengu. “Knowing that the applicant will have a certain number of customers who believe in the brand is just one aspect.
“Established brands also have tried-and-tested processes in the market, they have a mature and honed business model with track records and solid business projections.
“They also offer solid support in the form of training and guidance from experienced people who will guide new franchisees through all the pitfalls. All of this means less risk,” he said.
Because of the resilience of established franchises, banks and financial institutions take a positive view of such companies, Bengu said.
“Existing relationships with certain franchises afford applicants preferential status when applying for finance.”
Looking for a loan
“Banks are in the business of selling money,” said Bengu. “They always have the will to lend money to fund your operations, but they need to be satisfied that their investment is secure.”
According to Bengu, the process starts with the bank assessing your level of risk, exploring questions such as:
- Do you present a creditable prospect to the bank?
- What are your ethical standards in terms of honouring your obligations?
- What kind of credit record do you have?
- If you are unwilling or unable to honour your obligations, what collateral do you have to secure the loan?
Your worthiness as an applicant, however, isn’t just about your credit rating or balance sheet, said Bengu.
“Getting into any business is always an exciting experience, so people are always more likely to rush in without thinking everything through,” he said.
“People need to assess themselves honestly and thoroughly to determine if they are happy to spend an inordinate amount of time running that business. If they aren’t passionate, their business will fail.”