Equity is important for incoming franchisees as well as for franchisors. It is prudent to have more capital as it is less of a strain on cash flow and the breakeven sales number will be lower, advises Rod Nuttall from the Commonwealth Bank. Potential franchisees so often don’t understand what they are getting into, their commercial commitment, he fears. And the commitment has to go beyond financial: are the personal circumstances and business outlook linked to the franchise, he asks.

Franchise prospects need to look beyond marketing material when considering a franchise system, says Nuttall. That’s why we’ve linked with DC Strategy in an independent report partnership. Historically franchisee failures have been a result of there being a lack of research. If a franchisee presents a one page business plan when applying for finance, thatÍs a problem.

We’re not looking for the best Powerpoint presentation but evidence they’ve understood the key fundamentals. You’re buying a franchise because it’s a proven brand in multiple venues but what aspect about your venue will ensure or impede success?

We expect some in-depth analysis. Many franchisors have site selection criteria but this is the franchisee’s money so they need to do more research.

Julie Rynski, Bankwest head of business and private banking, and business and customer services, expects potential franchisees to have done their research: to have spoken to an accountant, a lawyer, asked themselves whether the system is robust enough.

When we’re lending we ask franchisees what is the best and worst scenario? It takes about a year to get the rhythm of the business and forecasts are always very positive. But as a franchisee gets established, what are your plans? What support is there from the franchisor and system?

For instance, benchmarking, perhaps relating to certain sales volumes to be achieved. What agreement is there with the franchisor for the support they would provide if the franchisee fails to reach the minimum level?

Bank loans are dependent on security, and accredited franchise systems provide reassurance to a bank. Says Rynski, those customers who don’t plan to use their home as security but work on cash flow only, well, the system would need to be accredited. If someone comes in and wants to buy a non-accredited business, we treat it just like a business loan.

ANZ general manager commercial products, Fred Ohlsson suggests in addition to business planning and research, aligning themselves with an accredited franchise system will benefit franchise prospects.

Nuttall admits that with many franchisees going into business for the first time getting realistic expectations about lending can be a challenge.

But the bank is determined the produce the best possible timeframes and is committed to reducing the wait for approval. Within 72 hours of receiving the information it lets the franchisee know if the deal is worth going through, if further information is required or if it doesnÍt fit the bank’s criteria.

If the wheels are set in motion in theory there should be no last minute hitch to funding proceedings, but potential franchisees themselves can be blame. Withholding information or imparting vague or incorrect costings or collateral value will scupper the plan, says Nuttall.

Franchisees should investigate the business thoroughly and have realistic house prices if they are offering that as security. If an applicant states that their house is worth $600,000 but when it comes to final approval the valuation shows its only worth $350,000, the deal is off.

Another example is stating the franchisee agreement as 10 years but it turns out to be only three years. Cutting corners or hoping the deal will go through with a change in the numbers is a shortcut to funding failure.
When the CBA formally approves a loan it will speak to the franchisee about the funding conditions and if they can’t then meet them, we need to re-assess the application.

Franchisors seem to have a real aversion to talking too much to incoming franchisees. It’s a real fear which stops projection of accurate information to help franchisees make an independent decision.

The franchising Code of Conduct is all around sharing of information, says Nuttall. Franchisors have to work out how to project the wealth of knowledge without leaving themselves liable.

Nuttall is an advocate of greater transparency and reminds franchisees that business development managers work to key performance indicators which are to open stores, so they are more likely to tell franchise prospects the upside as opposed to a balanced, independent view point.

There is no substitute for independent advice and a thorough grasp of the business. At the end of the day, the bank picked by the franchisees to fund their investment is a personal choice. Darren McAuliffe, national manager franchise banking with NAB cautions that price should not be the only criteria in determining which bank is right for a new franchisee; getting the right capital structure, business insight and superior service are also important considerations, he says.