Jobs Fund challenges commercial banks to support innovative franchise development model

South Africa’s commercial banks have an opportunity to contribute to economic growth and broader inclusion by crowding capital into an innovative franchise development initiative pioneered by the Jobs Fund. The initiative significantly reduces both the cost of capital and risk of failure, providing banks a risk-managed opportunity to contribute to transformation and growth in the South African economy.

Banks initially avoided South Africa’s gap housing market. Once the Jobs Fund tailored a risk-reduced model encouraging risk-managed commercial bank participation, banks crowded in. Similarly, the current Jobs Fund franchise development model presents, “a compelling risk-managed proposition for commercial banks to grow their loan books in South Africa’s dynamic franchise sector,” says Najwah Allie-Edries, Head of The Jobs Fund.

Factors critical to the success of franchises include; “the provision of upfront franchisee fees, lowering the cost of capital, reducing business risk for new franchisees, offering business support and mentorship, and selecting franchisors that have well-established systems and effective brand support,” says Allie-Edries.

Recognising these key enablers, The Jobs Fund partnered with Business Partners and the South African Franchise Warehouse to support franchise development. The project sought to improve the success of franchisees over a three-year period, establishing 125 new franchisees and creating 717 jobs. Specifically, “the initiative aimed to reduce business and operational risks while also easing access to capital for franchisees,” said Allie-Edries.

Midway through the project, the Jobs Fund team identified that the franchise development model could be significantly de-risked from a funding perspective if, “the Jobs Fund portion of the funding for start-up franchises was structured as a non-interest-bearing loan, repayable after 5 years,” explained Allie-Edries. This would relieve the start-up franchise from having to pay interest on the Jobs Fund portion of the funding, enabling the franchise to pay back the commercial interest-bearing loans first.

The Jobs Fund also identified opportunities for more appropriate risk sharing between financier, franchisor and franchisee. “This was particularly important for mid-tier franchisors more focused on expansion and thus more amenable to alternative funding and ownership models,” said Allie-Edries.

Franchisors are also encouraged to take an equity stake in the franchisee over the short to medium term, giving the franchisor more incentive to adequately support the new franchisee.

“The resulting lower debt-to-equity ratio, along with increased technical assistance, training and mentoring, has attracted more tier-one franchise brands to the project,” said Allie-Edries.

To date, 36 franchise outlets have been opened, eight of which are tier one. These franchises have created 762 jobs and trained 185 beneficiaries. Significantly, “80% of these new outlets are owned by previously disadvantaged individuals,” adds Allie-Edries.

The Jobs Fund is particularly excited about the potential of this innovative franchise development model and hopes to attract interest from commercial banks.

Banks have traditionally been hesitant to support start-up franchises as they are unable to offset what they view as high-risk with sufficient collateral or guaranteed earnings. The Jobs Fund funding model, however, lowers the debt-to-equity ratio of loans to start-up franchises because, “the grant portion provided by The Jobs Fund is listed as equity, meaning that the franchisees only have to pay interest on the bank portion of the loan,” says Allie-Edries. Also, since the Bank portion of the loan is repaid first, banks are first in line to receive payment and expand their loan book.

The interest-free Jobs Fund grant portion is only paid back later, once the franchise is successfully up and running.

This model presents a powerful government-enabled risk reduction proposition to commercial banks seeking to participate more broadly in South Africa’s franchise sector.

It is important, however, that the Jobs Fund portion is eventually returned as this ensures that the money becomes available for new franchisees. This will also enable the Jobs Fund to, “build an innovative ever-green fund using settled grants from successful franchises to support ever-more start-up franchises,” concludes Allie-Edries.