Starting your own business vs opening a franchise – an SA bank explains

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.”


Read: The 7 biggest franchising and business opportunities in SA right now


The Advantages and disadvantages of franchising

Absa has highlighted the following considerations when looking at whether or not to open your own franchise.

Advantages

  • No need to start from scratch: you have access to an established trademark, a proven operating system, valuable trade contacts and previous research.
  • Quicker break-even point: at least some members of your target market will know the brand and will want to do business with you immediately.
  • Ongoing franchisor support: you’ll enjoy consulting and mentoring services and will be kept abreast of developments in the market.
  • Peer support: you have invaluable access to like-minded individuals who share the same ups and downs and have experience in your sector.
  • Increased buying power: because the franchisor can usually provide discounted supplies.
  • Good resale value: a franchise is a branded business with a definite resale value. The franchisor may even have a prospective buyer on its database.

Disadvantages

  • Set-up costs may be higher: because the franchisor has a corporate image to protect, you won’t be allowed to cut corners when setting up. However, you’re likely to reach break-even point sooner.
  • You’ll need to pay ongoing fees: although the savings arising from group deals often exceed the franchise fees you pay.
  • You’re tied to other franchisees: weak franchisors could stifle the brand’s development and with it the development of your business, so evaluate the franchise carefully before investing.
  • You’ll operate in a clearly prescribed framework: some people resent this limitation of their freedom.
  • The need for a large market: unless there is potential to rapidly establish 15-20 units, franchising may not make commercial.

Read: How much it costs to open a top fast food franchise in South Africa

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Starting your own business vs opening a franchise – an SA bank explains