Kate Carnell’s office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has completed an inquiry into the need for better and alternative funding solutions of SMEs, to help address the “market failure” that is resulting in a limited supply of patient capital for the growth of SMEs.
Ms Carnell said: “In Australia, lenders consider SMEs high risk and offer capital with restrictive terms and conditions, at high interest rates and demand bricks and mortar as security, which is usually the family home” and that “unfortunately, the unintended consequences of the financial services royal commission for SMEs might be an increase in banking regulation, making it even more difficult for them to access affordable growth capital.”
The findings, in the ASBFEO Affordable capital for SME growth report, are just as relevant and arguably far more achievable for the Australian franchise sector.
The report finds “Limited competition — and risk-weighted appetite focused on real estate — limits lending to SMEs [including franchisees]. The market failure arises where SMEs [and franchisees] have limited collateral, other than a family home, to provide security for a loan. While private equity is an alternative source of capital, the majority of investors seek a rapid return. Private equity investors attempt to implement managerial and operational changes to improve the company’s performance before selling it for a profit”.
“Alternate lenders [online lending fintechs] do not require bricks-and-mortar security but do charge significantly higher interest rates, offer low amounts over short terms and may seek a personal guarantee… These finance solutions might provide a useful, short-term stop-gap but cannot provide patient capital for growth over time.”
The Ombudsman recommends and calls for the private sector to establish a $1.5bn Business Growth Fund to provide a national solution (similar to that in the UK).
Franchise Partnering Fund
Elcano has been developing the Franchise Partnering Fund for some time. In doing so we have considered the risks to franchisors, franchisees, investors and ourselves as the manager. We have already commenced discussions with anchor franchise relationships to deliver the fund.
A careful analysis of the Ombudsman’s recommendations against the Franchise Partnering Fund makes it seem we had developed the fund specifically to Ms Carnell’s specifications.
|ASBFEO identified SME funding solutions||Franchise Partnering Fund (FPF)|
|1. Combined debt (loans) and equity (investment);||The Elcano developed ‘Hybrid Capital Model’ that will be used in the fund is a combination of debt and equity, maximising the benefits of each.
|2. Amounts between $250,000 – $5M;||FPF amounts are customised to each franchise group’s needs.
|3. Terms up to 7 years;||Terms up to 7 years, plus a funding solution for the refurbishment (reinvestment) of the business when needed.
|4. Secured against the business and owner/director guarantees;||Significantly lower franchisee capital input needed and no collateral security requirements. Achieved because the franchisor is backing their business model and site selection capabilities.
|5. SMEs to receive mentoring, coaching, access to expert staff (PE/VC style);||Franchising is the best business model for mentoring, coaching and supplying expert support to assist in franchisee success. The FPF model further ties the franchisor to the franchisee’s success.
|6. Fund operates commercially, independent of government;||FPF will answer commercially to its investors and is independent of government while operating within the legal and compliance framework.
|7. Uses technology as “low-cost delivery model”;||FPF will be delivered through the Franchise Finance Market, an online platform already assisting over 230 franchises to finance their franchisees. The platform provides many benefits to franchisees and franchisors. It also consolidates franchise finance data for the sector. It will continue to grow in its capabilities as the low-cost delivery model for FPF as well as other financial products and services benefitting franchisees.
|8. Loan/investment decisions made by (gov’t independent) professional managers with performance assessed on a “fully commercial basis according to private sector funding models”;||Elcano Funds is the independent professional manager of FPF with Mr Rodney Nuttall, Australia’s most experienced franchise lending expert after a decade of managing franchise lending at both ANZ and CBA banks, its Managing Director. Elcano also includes Messrs Graham Hart AM (past CEO of the Bank of Queensland), David Gow (past MD Corporate Finance Asia Pacific CitiGroup) and Stephen Rasmussen (director Finance Brokers Association of Australia) on its board.
|9. A government independent investment committee responsible for setting overall lending/investment parameters;||FPF’s investment committee is to comprise of equal representation between the manager, Elcano, and the franchise sector. Ensuring FPF is commercially operated while also achieving the best outcomes for the franchise sector. Could you imagine a bank asking SMEs to be on its finance committee?
|10. Government’s only role the initial promotion and assistance to clear regulatory barriers;||Elcano already works within the regulatory framework. It is possible the industry association (Franchise Council of Australia), the ASBFEO and the government could promote the merits of FPF, given FPF works in collaboration with franchisors to give franchisees much better funding choices and in a manner that reduces franchisee risk.
|11. Capital could be sourced from the Future Fund, superannuation funds and banks.||Elcano’s strategy is to source the initial FPF funds from private investment, however, given growing political and social support for improving funding to SMEs and franchisees it is possible such sources as the Future Fund, superannuation funds and banks could become available (helping franchisees by lowering funding costs) in subsequent years.|
The Franchise Partnering Fund will only be able to answer the franchisee funding call because of it includes franchisors that are dedicated to the success of their franchisees and will back those franchisees and their own business model.
If yours is just such a franchise and you would like to be part of the Franchise Partnering Fund let me know, Darren Lelliott 0431 775 252 Darren@FranchiseFinance.Market.