Funding Your Franchise Business

While taking up a franchise may give you a head start on many counts as compared to building a business from scratch, when it comes to financing, you’re faced with the same challenges you would with any start-up. Seeking the help of the franchisor at the outset can open a few doors and ease the pain considerably.

Be prepared to spend as soon as you decide to buy a franchise. At the outset, you may have to pay a franchise fee in return for the right to use their brand and conduct business in a certain territory.

The franchise fee can vary significantly; obviously the better known brands cost a lot more. There could also be a differentiation in fee based on size and location of territory. See if you can negotiate a staggered payment with the franchisor, in proportion to revenue inflows, so that you don’t have to block cash upfront.

Next come real estate and establishment expenses. If you don’t have your own place, you will need to locate something suitable to rent and do it up in accordance with the franchise branding guidelines. Remember, fancy consumer brands will expect conformity with their public image and you have to be prepared to fork out quite a bit. The good news is that there may be a nominated interior design agency that is given the mandate to do up all franchise interiors, and since they may have entered into a long contract with the franchisor, could give you better rates and credit terms.

If your business is product retailing, inventory costs could stretch your resources, especially in the early days when you have to stock up. Some franchisors supply goods on consignment, which means the franchisee need not block funds in inventory – check if that option is available. Alternatively, always be on the lookout for softer credit terms.

These measures will help ease the pressure of initial financing requirements, especially when there is no revenue to balance the outgo. That being said, you will have to arrange for adequate funds to tide your franchise business over the initial two or three years. If you have sufficient resources already, that is the best case scenario. However, if you need to arrange financing from external sources, discuss with the franchisor whether they have a system in place that can make it easier for you. Generally, they will have tied up with a financial institution for giving business loans to new franchisees. Going that route may be a simpler and faster option, than approaching another bank for money.

Making a budget for your small business

Budgeting is not just an art, it is a learning process in itself. A well made budget is critical to the survival of any business. It tracks the flow of finances and provides insight into those areas where there is excessive expenditure, thereby allowing an opportunity to make corrections.

A small business can make budgets at different levels – one for the business as a whole, or for special projects, for example, a marketing campaign. Budgeting is a complex exercise, and is always subject to revision since it has to reflect ground realities. Therefore, it must be looked at as the first step towards understanding the financial position of the business and not a be-all.

The following tips may come in handy for a small business owner about to embark on his or her first budgeting exercise:

Err on the side of caution. Keep revenue expectations low and overstate costs. Remember, there will always be that odd contingency that will suck extra funds from the system.

Favor business growth over cost control. There will be times when you need to spend more than what you initially intended on a specific activity. If that is going to contribute to the enlargement of the business, go for it. A budget must not limit the prospects of your business; however, use this as a learning to be more accurate in your future estimates.

A budget, however well made, is good as naught if not monitored closely. When expenses come close to the pre-set limits, act quickly to see whether they need to or can be contained.

Watch the cash flow, which is even more important than profit. A business that spends more frequently than it collects is heading towards a tight spot. Therefore, while making revenue projections, bear actual credit terms in mind. It is worth closing a contract at a lower price on cash and carry basis, versus a high price-long credit option.

Budget for contingencies, and keep adequate liquidity to meet those emergencies.

Finally, be realistic. Costs will go up, some customers will not pay and a few orders may not materialize. A well made budget must recognize these realities, yet must not be so “easy” that it throws no challenge to the management.

Funding Start-ups in Rural India

In a post last week we spoke about how institutions were taking initiative to develop the skills of small entrepreneurs. Now, ICICI Bank has announced that they will fund start-ups in specific sectors that offer employment opportunities to the poor and rural communities, through the Institute of Financial Management and Research, also promoted by the Bank.

About 14 sectors including rural infrastructure, sanitation,financial services, health and sanitation have been identified for placing equity.

ICICI Bank has taken the lead in serving rural markets, so this seems like a natural and welcome inititative. It remains to be seen whether others will follow.

Funding a Small Business

When starting a business, obviously one of the prime concerns is how to sustain funding. The entrepreneur or promoter group will have to bring in capital to the start up business, and quite often, in the case of small business owners this money comes from personal resources.

Under a private limited structure, promoters may borrow from close family members, but not from the general public. Borrowing from family helps circumvent procedure, which is inevitable while taking a bank loan, but could create other types of problems. It is advisable to treat the loan as a “business transaction” and agree to some terms of interest and repayment beforehand, even if they are softer than market.

The promoter’s equity/ funding does more than just cater to the needs of the company – it indicates commitment from those who have set up the business. Should there be a need to approach other sources for financing, this number will come up for discussion.

Taking a business loan from a bank might be necessary at some stage. Banks offer different types of SME (Small and Medium Enterprise) loans, aimed at financing working capital, equipment purchase and other needs.

If the loan is small (upto Rs. 25 lakhs), the conditions are softer and no collateral may be necessary. That being said, the bank will still examine the fundamentals of the business before handing over the money.

Rates can vary – a nationalised bank quotes between 9% and 13% for small business loans.

Once the business generates revenue and the order book fills, commercial finance becomes a real option.