Guide to Franchise Funding in South Africa

Starting your own business is not the only way to get into business. The other option is to jump onto an existing business chain. This is called buying a franchise. From fast food businesses like KFC and McDonald’s to stores such as Legends Barbershop and OBC Better Butchery, the franchising opportunities are many.

A franchise is when you use the products or services of an existing company. The company which owns the products is called a franchisor. If you buy a franchise, you are considered a franchisee.

By owning a franchise, you must pay royalties and usually an initial fee for the right to conduct business under the franchisor’s name and system.

It’s a quick way to get into business, however, it’s not exactly a cheap way to get into business. This means you’re going to need funding.

In this guide, we look at the franchise funding options available in South Africa, how to get them and how they can help you start your franchising journey.

The National Empowerment Fund (NEF) is a government agency that aims to facilitate and promote black economic participation. Founded in 1998, the NEF provides financial and non-financial support to black entrepreneurs and groups. Additionally, it supports Broad-Based Black Economic Empowerment (B-BBEE) under government legislation.

Amongst its many funding options, the NEF also provides franchise funding. On its website, it says it provides franchise funding to “reduce risks associated with start-up businesses lacking a track record.” This type of funding falls under its iMbewu Funding initiative.

The vital criteria for this kind of funding are:

• The NEF prefers to fund well-established franchise concepts.
• Active management involvement by BEE parties is required for funding.
• Have a minimum BEE shareholding of 50,1%.
• The franchise funding is a loan agreement. The loan agreement matches the duration of the franchise licence (up to a maximum of 7 years).
• Before approaching the NEF for funding, the BEE party must be approved by the franchisor.
• The funding amount is limited to R 10 million.
• The NEF franchise funding uses the debt funding method.
• NEF franchise funding is charged at prime-linked interest rates.
• The NEF will exit the investment in 5 to 7 years.

To apply for the NEF’s franchise funding, complete the application form with the correct documentation. Once your application has been sent in, it will be reviewed by the investment committee. If successful, the funds will be disbursed to you.

Note: The application process from the NEF can take up to 4 months from when your application has been received.

Traditional banks in South Africa provide a range of business financial services. This also includes financing for franchise purchasing. Let’s look at the franchise financing options from Standard Bank, Capitec and FNB.

1. Standard Bank

Most franchisors will require an initial upfront fee to fund your franchising ambitions. If you decide to use Standard Bank’s franchising funding option, you will need to provide the following information:

• Written confirmation from the franchisor that you have been approved as a franchisee.
• Copy of your ID.
• Personal balance sheet which showcases your assets and liabilities.
• Your background information, which is like a CV.
• Proof of where you got your unencumbered deposit.
• A comprehensive business plan for your potential franchise.
• Copy of the lease and franchise agreement.
• Copy of the agreement of sale (signed) which stipulates the conditions of the sale.
• A breakdown of the equipment you need to finance, including rand value per item.
• Applicable CIPC registration certificates.
• Signed latest financial statements and a 12-month cash flow projection. The financial statements must be no older than six months.
• Latest six months bank statements of your business’ trading account.

Note: To apply for franchise funding from Standard Bank, send an e-mail to franchising@standardbank.co.za or call (+27)11 344 5438.

2. Capitec

Capitec has two franchise financing options. One being for when you buy a new franchise (your own store), and one for buying a franchise that is already in operation (from another franchisor).

The following is required by Capitec for new or existing franchise purchases:

• Confirmation from the franchisor of conditional approval of your application.
• Summary of your background, experience and planned involvement in the franchise.
• Details of where the franchise’s locations, competition in the area, parking access and visibility.
• CIPC documents and confirmation reflecting group structure (including shareholding and directors).
• A detailed breakdown of the setup costs for the franchise.
• Details of your funding requirements and the whole investment required for the franchise. This includes working capital, rental and stock guarantees.
• Proof, source and amount of your financial contribution for the franchise.
• Personal balance sheet of all shareholders/owners. This must include assets and liabilities or any money you owe.
• Valid copies of the IDs of all shareholders/owners.
• Proof of residential address of all shareholders/owners.
• Projected monthly cash flow prediction for at least three years.

When purchasing a franchise that is already operational, you need to submit the following additional information:

• Copy of the sale agreement.
• Latest financial statements and management accounts of the franchise.\A fixed asset register.
• Reason for the sale of the franchise.
• How long the business has been trading.
• When was the last revamp, when the next one is and what the estimated costs are.

Note: To begin your franchise funding application with Capitec, e-mail franchising@capitecbank.co.za.

3. FNB

FNB also offers financing options for new franchises and already operating franchises. To apply for franchising financing from FNB, you need to submit the following:

• Approval letter from the franchisor stating your application meets their requirements.
• A business plan that addresses site/area, management team, tenant mix and competition.
• A personal balance sheet of all prospective shareholders and sureties.
• Comprehensive CV of all shareholders and management.
• Detailed proof of the source of the financial contribution of each shareholder to the franchise.
• Comprehensive breakdown of all set-up costs including assets and values to be financed.
• Monthly cash flow forecast for at least the next three years.
• Draft lease agreement which must be valid for at least five years.
• Any key documents relating to the management practice of the franchise.
• Bank statements for the last six-months. This is only applicable for non-FNB applicants.
• Any copies of customer contracts obtained, letters of intent and/or orders.
• Copy of company registration from the CIPC (for close corporations) and certificate of incorporation (for companies).
• Copies of IDs for all shareholders and sureties.
• Latest proof of residential address.
• Copy of marriage certificate or divorce decree (if applicable).
• Day one balance sheet for your new franchise.

For financing the purchase of an existing franchise, you will need to submit the following:

• Copy of purchase/sale agreement of the franchise.
• Copy of fixed asset register or list of moveable assets with values.
• Audited annual financial statements of the purchase of the franchise you are purchasing.
• Latest management accounts including income statement, balance sheet, trial balance, and debtors and creditors age analysis (if financial statements are older than six months).
• The loan agreement and facility letter from your current bank (only applicable to non-FNB clients).

Note: FNB might require more documentation post-approval depending on approval conditions. To apply follow the link or e-mail franchising@fnb.co.za or call (+27)87 736 2111.

Lending platforms are tools that allow SME projects to receive financing. Private lenders are individuals, groups or organisations that provide financing to businesses.

If you are interested in starting a franchise, you can approach a lending platform or private lender to help you with capital. Some of the most popular lenders include Business Partners Limited, the Old Mutual Masisizane Fund and crowdfunding initiatives.

Business Partners Ltd, is a private lender with a focus on helping entrepreneurs and small businesses with funding. The company provides financing ranging from R 500 000 to R 50 million.

To qualify for funding from Business Partners Ltd, you need to meet the following criteria:

• A comprehensive business plan.
• Latest annual financial statements.
• Up-to-date management accounts.
• A CV of the business owner or owners.
• Be registered with the CIPC.

To apply for funding, fill in the form online and the company will get in touch with you if you meet the requirements.

Note: Business Partners may ask for additional documents if need be. This could include business permits, franchisor agreements etc.

The Masisizane fund is a non-profit organisation that provides support to SMEs. The fund focuses on financing majority black-owned businesses. The fund’s financing capital is up to R 20 million.

To qualify for funding, you need to meet the following criteria:

• Your business must be owned by 51% black South Africans or naturalised South Africans.
• The main shareholders or business owner(s) must be involved in the daily operations management of the business.
• Your business must have a formalised registered business structure and comply with all relevant laws that your business falls under.
• Your business must clearly define its products or services that are marketable.
• A demonstrated commitment by you including financial or non-financial contributions.
• Your business must be viable or have the potential to be viable. It must also showcase an ability to meet its ongoing commitments, including loan repayments.

To apply for the funding from the Masisizane Fund, send an e-mail to MasisizaneEnquires@oldmutual.com and they will help you with the application.

Crowdfunding is a way of raising funds through the support of family, friends, customers or investors. Crowdfunding is usually done on an online platform. The money you raise through crowdfunding can help finance your franchise ambitions.

In South Africa there are a few crowdfunding platforms including The Angel Investment Network, and Thundafund.

The Angel Investment Network

Popularly known as the South African Investment Network, it is a paid membership platform that connects entrepreneurs to local and international angel investors. The angel investors are usually wealthy former entrepreneurs who provide capital to early-stage businesses. In exchange, they will want equity or convertible debt.

To raise funds on the platform, you need to:

• Sign-up on the website and use the available resources to create a business pitch.
• You must set the minimum and maximum amount you require.
• Provide your business information.
• A short summary of what your business does or will do.
• What type of investing you are looking for.
• Financial statements.
• A list of the management team, shareholders and business owner(s).
• Images and videos to accompany your pitch.
• To sign up on the platform, follow the link, pick a membership package and begin.

Thundafund

Thundafund is a rewards-based platform which allows people to make donations to businesses, and in return, they get a reward. You can raise funds for anything on the platform including charitable causes, franchises or starting a business.

To raise funds on the platform, you need to meet the following criteria:

• Your business must fit into one of the 13 categories on the platform. These include food and beverage, art and photography, design, events etc.
• You must be over the age of 18.
• Outline what the money will be used for.
• Set a clear outline about what your target goal is.

Note: If your financial targets are not met within the set time, all donations are returned to the donors.

There are other crowdfunding platforms such as The People’s Fund. However, the People’s Fund only caters for purchase orders. It helps people raise funds for orders they might have with the government or private organisations.

For more information on the right franchise to buy, read our article about Franchising Opportunities in South Africa.