Cons of using micro loans for franchises

FNB has seen an increase in the number of entrepreneurs considering using micro loans as an alternative form of franchise funding – while qualifying for bank finance.

Morne Cronje, Head of Franchising at FNB Business says although micro loans may appear attractive at first glance, they do not provide entrepreneurs with a holistic financial services offering that can sustainably support a franchise business. In the long-term, they present many disadvantages for the franchise.

He unpacks the disadvantages of using a micro loan to fund a franchise:

  • Inadequate debt structuring options – franchises who are facing cash flow and working capital challenges have limited options to restructure or renegotiate funding with micro loan providers. Consequently, entrepreneurs may end up in a far worse financial position.
  • No mutually beneficial relationship – it is essential to partner with a financial services provider that has a good track record and can assist both the franchise or franchisor with the necessary tools and guidance to sustainably grow the business. Furthermore, the business would be assigned a dedicated franchise specialist who can help it navigate some of the common challenges of running a franchise.
  • Limited funding options – a micro loan only provides the entrepreneur with a specific amount of money which the franchise owner should be able to pay back after a reasonable amount of time.

Banks, on the other hand, provide franchises with innovative and tailor-made banking solutions to meet all the business’ unique franchising needs:

  • Commercial property finance – whether the business is renovating or re-financing a commercial property it can get a personal service at competitive rates.
  • Transactional solutions – these include a range of financial solutions, such as investment accounts, current account, merchant services and cash solutions, amongst others.
  • Credit facilities – ranging from overdraft, business asset finance, guarantees and various business loans.
  • Unfavourable interest rate – despite the period required to pay off a micro loan being shorter, the business is likely to pay a higher annual interest rate on the loan amount. Moreover, with bank loans, businesses have greater flexibility on what the funds can be used for, compared to the conditions that come with micro loans.

“Before applying for funding, consider the overall value and support you are getting from your financial institution. The decision should not be solely based on finance, but access to banking solutions that can assist with the alternative funding, scaleability and more,” concludes Cronje.

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