We have previously commented on the concerning trend of fintechs focused on SME lending and how many are not doing franchisees any favours. Yes, they are making funds available in a tight and tightening finance market. But at what cost?
It does not benefit franchisees or their franchisor if too high a cost of finance has been used. The first 12 – 18 months in a new franchise are hard work with tight margins. Those margins will most likely be non-existent if the franchisee is paying 41% interest rates on their finance.
That was not a typo, 41% interest rates.
Last week the SME lending fintech darling, Prospa, pulled its listing on the ASX only 15 minutes before it was to happen. Since then a couple of interesting things have been revealled by the media.
Prospa’s prospectus, that thing used to give disclosure and attract investors, states:
Page 44, footnote 11 on their Annual Percentage Rate (APR): “We use a factor rate in our pricing discussions with customers because we believe the total interest dollar cost and the total payback of the loan is (sic) the most relevant to our customers … At 31 December 2017, the weighted average APR (on a gross loan basis) of our portfolio was 41.3%.”
I have had many franchisors laugh because a bank has told them their franchise is ‘accredited’ with them and then offer their franchisees finance by issuing a credit card. But the joke is a credit card would be cheaper than some SME focused lenders’ best product offering.
Prospa was 15 minutes away from floating with a market value of $576.3 million. That would have been a payday of $9.8m for both the founders (still leaving them owning $$89.5m and $22.2M), the private equity chairman $2.2M (remainder $5m).
The franchise sector has unique qualities that, if done right, will give it the opportunity to take control of its own finance solution. Elcano and our Franchise Finance Market are partnering with the franchise sector to take control of franchise finance.