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FRANCHISING: BANKING SECTOR IS A PILLAR OF EFFECTIVE BUSINESS

04/04/2019

Franchising as one of the most progressive forms of business is becoming an increasingly comprehensive phenomenon of the modern economy. According to the experts, 2019 is expected to mark the year of professionalization for franchising: competition for new franchisees has never been more intense. Thus, a flexible approach and new solutions are required from market players – both growing franchise networks and top range brands – to increase competitive efficiency.

 

“Franchisors will need to maniacally focus on franchisees’ profitability”, predicts Joe Mathews, founder of the Franchise Performance Group, a member of the International Franchise Association (IFA). “Brands will look to build exclusive strategic lending relationships with banks, fleet leasing companies, and other financial institutions to gain access to start up and expansion capital, securing liquidity for their system”.

 

At the same time, it may well be that the rise of franchising will not only change franchisors’ behavioral patterns, but also encourage the banking sector to develop unique and relevant products. Due to the growing demand for franchises, banks and microfinance organizations are likely to introduce special, more lucrative offers for those who want to get a loan for a franchise, while the requirements for borrowers will get more favorable as well.

 

An upward trend in the popularity of franchising is of particular relevance in Russia: the annual increase in the number of enterprises doing franchise business in the country is no less than 15%. The holding of the World Franchise Forum in the previous year in Moscow, along with the annual edition of Moscow Franchise Expo, became the actual recognition of Russia’s franchise market achievements. On the sidelines of the event, Moscow Mayor Sergei Sobyanin noted the high rates of franchising development in the Russian capital: “Franchising networks already unite 10 thousand sites in our city. This includes more than 200 thousand jobs and 40% of the city’s market of goods and services. The industry is developing at a good pace and has great potential for further growth”.

 

It is noteworthy that in the second decade of the 21st century, the economic crisis of 2014 has been one of the factors that spurred the development of franchising in Russia. However, this correlation has a fairly logical explanation: financial instability induces entrepreneurs to exercise extra calculation. This applies to both start-ups and well-known business owners: for the former, buying a franchise helps avoid the risks of starting a business that may outweigh potential benefits; for the latter, franchising offers one of the most efficient network development models with an established operational management.

 

In this regard, it is possible to expect an increasing interest of both franchisors and franchisees in getting support from the banking sector, which is able to provide not only financial, but also equally important external expert support: for example, before approving a loan to buy a franchise, a bank gives the company that sells its product a long look, scrupulously checking its business model as well as its financial and legal documents.

 

In late February, Credit Bank of Moscow, one of the country’s largest banks in terms of lending to enterprises and organizations, became a partner of the Russian Franchise Association (RAF) – a rather outside-the-box solution, given that members from the banking sector can be counted on fingers. However, the bank considers membership in the RAF as a resource that will allow more efficient financing of entrepreneurs who are going to purchase or develop franchises. Alexey Rudakov, Managing Director at Credit Bank of Moscow highlighted the advantages of banks’ participation in franchise cooperation: “It is important that we offer solutions for revenue collection, including self-encashment terminals, as well as tools for working with balances on settlement and deposit accounts. Using such complex solutions, we are able to completely cover the financial needs of the franchisee”. RAF membership typically covers networks that do business in the HoReCa field (e.g. Hilton, Burger King, Domino’s) and food retailers. The latter includes, for example, Pyaterochka, the grocery store network and partner of CBOM – that is part of X5 Retail Group, a multi-format retail company that was listed among Europe’s 10 largest retailers in 2018.

 

One has to admit that the Russian banking sector has yet to go a long way in adapting its offers to the needs of franchisors and franchisees. Some banks in the country (for example, VTB, which launched a pilot project on lending to entrepreneurs who develop a franchise business in 2017) have already entered the market with special products: Sberbank and Alfa Bank are another two banks with tailored proposals. However, today they are still playing rather the role of pioneers since targeted lending for franchising purposes in Russia is not as developed as, for example, in the UK. The largest British banks, such as HSBC, Lloyds TSB and RBS/NatWest, have specialized units that are solely responsible for working with franchisors and franchisees and better understand the nuances that distinguish franchise financing from traditional start-ups.

 

Against the background of franchising development in Russia, this practice seems relevant and has all the chances to take root, providing business with additional support and stability. Here, the Russian banking sector should incorporate the principle voiced in particular by Catherine Hayes, the former head of franchising at HSBC and now heading a similar department at Revive! Auto Innovations: “The best business banking isn’t just about money – it’s also about creating strong supportive relationships”.

 

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Finance Derivative is a global financial and business analysis magazine, published by FM.Publishing. It is a yearly print and online magazine providing broad coverage and analysis of the financial industry, international business and the global economy.