‘Franchising mitigating risks associated with start-ups’
Franchising has been highlighted as a key factor that mitigates the majority of the risks associated with start-ups.
Experts, who spoke at the Small and Medium Scale Enterprises (SME) and Franchising Nigeria Exhibition and Congress held recently in Lagos, said one of the surest ways of spiking the growth of formal SMEs in the country is through franchising.
“There are two major types of funding options for franchising, namely equity and debt. In most cases a mixture of the two is applied. As the franchise opportunities expand, we forecast increasing contribution from the debt option simply because the franchising model helps mitigate majority of the risks associated with startups,” said George Ogbonnaya, group head, SME banking, First City Monument Bank (FCMB).
“The issues of market and product risks are very much mitigated with a successful franchise model. The management capacity and operational risk are also minimised. The resultant effect will be a progressively higher ratio of debt to equity in the funding franchise opportunities,” said Ogbonnaya.
Available data show that SMEs represent about 90 percent of the Nigerian manufacturing and industrial sector in terms of number of enterprises and 65 percent of them fail within three years of start-up.
With franchising rapidly increasing in Nigeria, the option to finance the business through acquiring debt has become more popular as a franchising model alleviates most of the risk associated with new business.
Obinna Igwebuike, partner, Sawubona Advisory Services, said, “Franchising takes away the stress of building the foundation of a business. Franchising gives you an operating system where you need to build the capacity to implement the operating system.”
Entrepreneurs seeking to set up franchises have several debt options to finance their businesses. Future finance owners could consider and explore asset loans, trade finance, project finance, MSME fund and guarantee schemes, experts say.
“The various financing options address various business needs. For instance, the MSME fund is a dedicated development fund available to SMEs at a single digit interest rate and it is only available to businesses in production/manufacturing and agric value-chain and can be utilised to fund asset acquisition, expansion or trade finance,” Ogbonnaya of FCMB said.
“The eligibility for funding depends on several criteria: the credibility of the promoters and business sponsors, the ability to sustain business operations as exemplified in the management capacity; testing the franchise model and past finance performance; business profitability; ability to absorb the funding cost and other expenses; the size of equity brought into the business by the promoters relative to the debt; and finally, clear primary and secondary repayments,” he added.
According to analysts, the Nigerian franchise market, despite being in infancy stage, has the potential to generate more than one hundred billion dollars in annual revenue from products and services.
Speaking on the importance of the first edition of the event, Simon Page, managing director, Informa Life Sciences Exhibitions, said, “The event seeks to provide numerous opportunities for SME and franchises to further expand their presence and grow.”
Josephine Okojie