The idea is there, but the system is not.
For a business to succeed, a good and novel concept is important. However, a brilliant idea is no good with no proper follow-through and execution. This is where start-ups usually fail.
To reduce the chance of failure, some entrepreneurs opt to just latch on to an already existing business concept with an already tried-and-tested system. In other words, they go the franchising route.
Over the past few years, and particularly during the years of the recession when many—mostly overseas Filipino workers—lost their jobs, the number of franchised businesses in the country soared.
The openness of banks to lend capital to entrepreneurs wanting to go into franchising also paved the way for explosive growth in the sector, franchise guru and Philippine Franchise Association (PFA) chairman emeritus Samie Lim says.
“Many banks are now giving franchise loans, with some willing to finance up to 70 percent of the capital cost. They now recognize that franchisees may be the best clients because franchises have a 90-percent chance of success,” he says.
According to PFA data, franchised businesses accounted for $9.45 billion, or 30 percent of total retail output in the country last year. To date, more than 1.02 million people are employed in the sector.
The World Franchise Council’s latest report showed that the Philippines was just behind the United States in terms of number of franchisees at 124,000 as of end-April. The country also ranked fifth in terms of number of franchisors with 1,093.
Lim says these numbers were expected to grow even more as would-be franchisees get much-needed financing help from local banks.
First of its kind
BPI Family Savings Bank (BFSB) was the first to offer a financing scheme designed especially for franchise businesses. The BPI Family Ka-Negosyo Franchising Loans, according to BFSB vice president and commercial loans division head Ma. Mercedes Roces, were tailor-fit for micro and small businesses that banks often ignored.
“We looked at all segments and saw that nobody’s focusing on the small and micro businesses. But they’re the ones who need financing the most, as it’s harder for them to access financing compared to large corporations. That was when we came up with the Ka-Negosyo brand,” Ms. Roces tells Business Friday.
Borrowers can opt to go for the Lite Mode—which requires only interest payments for the first six months, with principal plus interest payments to start from the seventh month onwards—or straight amortization. Loans will have a minimum tenor of two years, with interest rate to follow prevailing market rates.
The minimum loan amount is P500,000, all for one-time credit to the borrower’s account. Acceptable collateral include real estate, deposits, and other “acceptable” investments.
Roces says loan processing would take anywhere from 10-15 days, depending on the completeness of the requirements.
Since the launch of the franchising loans early this year, she relates that more than 7,000 micro and small entrepreneurs have availed themselves of these loans.
Tailor-fit to requirements
To make the loans even more helpful to start-ups and small businesses, she says BFSB has tied up with the country’s two largest franchise groups: the PFA and the Association of Filipino Franchisers Inc. (AFFI)
Franchisees of franchisor-members of these two organizations have an easier time applying for the loans, as they are backed by brands that already have good track records in the industry. However, the Ka-Negosyo loans are also open to non-members of these organizations, she says.
The bank mainly looks at the borrower’s own track record, its financial statements, and the viability of its business—thus dictating its capacity to pay—moving forward.
BFSB also has financing schemes tailor-fit to individual companies’ requirements, Roces says. So far, customized franchising loan packages are available for Avon, Monterey, Mini Stop, Aquabest and Netopia, with several other companies now being processed for approval.
“We want to have 20 more brands for this scheme,” Roces says. “The terms of the loan depend on the terms of the franchisor. We understand that each franchisor has different demands and requirements. Our customized loan packages take these into account.”
Less intimidating
Not only does BFSB work to make its loans as easy to access as possible; she relates that it also comes out with tools to make the borrowing process less intimidating, especially for start-ups that have never taken out a bank loan before.
In the Ka-Negosyo website (www.kanegosyo.com.ph), would-be borrowers can take a shot at the assessment test to gauge their potential to be approved.
“We’re trying to make it less intimidating to people. By taking the assessment quiz, before you go to the bank to apply, you’ll have an idea if you can qualify. At least you’ll have some confidence to actually try to get a loan,” Roces says.
Even without taking the quiz, she says would-be borrowers can follow a the rule of thumb when it comes to borrowing and amortizing: monthly payments should make up not more than 40 percent of one’s take-home pay.
“Even employees or small start-ups can get a loan, as long as their income can handle the amortization,” she says.
Other banks
Roces says other banks should also start offering similar franchise business-specific loans soon, as this looks to be where the industry is going.
The Lucio Tan-owned Philippine National Bank recently launched its Kabuhayan Franchise loan, which could serve the needs of both start-ups and increasing franchisees.
The loanable amount ranged from P500,000 to P10 million, for one-time credit to the borrower’s account, with a maximum tenor of five years. Acceptable collateral included acceptable real-estate mortgages and hold-out on deposits.
PNB offered a longer grace period of one year on principal repayment, subject to evaluation. Payment of principal plus interest would start after that.
Interest rates vary depending on the tenor: 8 percent for a one-year term loan, 8.5 percent for two years, 9 percent for three years, 9.5 percent for four years, and 10 percent for five years.
Only franchisees whose franchisors are members of PFA and AFFI will be allowed to apply for the Kabuhayan Franchise loan. PNB can lend as much as 75 percent of the capital required to set up a franchise, with the final amount to be subject to the evaluation of PFA and AFFI and to depend on the value of the collateral.