As franchisors know, it can take months to get a new site open, only for the deal to unravel at the final hurdle of finance.
“It happens constantly,” says David Edwards, head of strategic growth at Banjo Loans. “The franchisee has gone through the process, signed in principle, completed training and assumed the bank is going to come through. Then, at the 11th hour, the bank declines, and everyone is left high and dry.”
That collapse is more than an inconvenience. Banjo’s latest SME Compass research found 85 per cent of franchisees and 96 per cent of franchisors access external funding, while 87 per cent of franchisors say their franchisees’ challenges accessing finance has limited their network growth plans.
Greenfield sites feel the pressure most. A new location has no trading history, making it hard to be assessed under standard lending models. Major banks may lend to franchise systems, Edwards explains, but often only up to an exposure limit once accredited, and a strong deal can still be rejected.
Many lenders also want at least two years’ trading, while a greenfield franchisee starts from zero. Prospective owners may need to rely on home equity or family support, or walk away from a deal they’ve spent months pursuing.
Why the franchise system matters
Banjo’s view is that a franchise shouldn’t be assessed like a lone start-up. A well-run system reduces risk: the brand exists, the model is proven, training is built in and the supply chain established. It may also support setup, admin, technology and marketing that would otherwise fall to a new owner, not necessarily experienced in all these disciplines.
Before extending greenfield finance, Banjo accredits the franchisor through an internal review covering brand history, franchisee numbers, financial position, credit reports, adverse media and franchise agreements. Where available, it also draws on FRANData’s Fund Report, covering financials, turnover, closures and franchisee engagement.
“That gives us a baseline,” says Anerike van Dyk, credit analyst at Banjo Loans. “If a new site is forecasting revenue above or below the system average, we can ask whether the assumptions are realistic.”
The franchisee is then assessed on their own merits, particularly the cash-flow forecast. For example, for a new gym, a full view of how the membership base will build over the next two to three years is critical, including the story that underpins how this will happen.
Banjo recently reviewed a new fitness site in Victoria that had already been trading for two months. Its first month missed the membership target, but the second exceeded it, prompting a conversation about what had happened, rather than automatic rejection.
The operator matters, too. In one services-franchise example, the franchisee recruitment process prioritised whether the prospective franchisee was comfortable building relationships and finding customers, since payroll, HR, admin and technology were handled centrally, leaving the owner free to focus on sales. This is a good signal for a lender that the system is well run.
What lenders need to see
A forecast works best when paired with a clear explanation of why the site can meet or beat the system average: location, local demand, sales experience, pre-launch memberships, partnerships or other customer-acquisition plans. The franchisee must also understand the figures. It’s one thing to submit a forecast, another to explain how the business will achieve it.
Then there’s skin in the game. One franchisor asked for at least 30 per cent of the project cost from the new owner; again a good signal to a lender that the owner is deeply committed to the business.
Costs vary by sector, but the pattern repeats
A specialised design-services franchisee needed funds for fitout, equipment and working capital to cover the franchise fee and early projects. The funding covered the equipment needed to serve customers from day one and running costs while the business built a local customer base.
Conversely, a sports club faced a working-capital shortfall in its first three months while building membership. That funding covered operating expenses through the slow months, freeing the owner to focus on marketing and membership, not bills.
And then there’s speed
Edwards says Banjo recently financed a franchise deal within 48 hours after a bank pulled out late in the process. The point, he says, is “not speed for its own sake, but preventing a deal from dying after everyone has already invested time, effort and money.”
For franchisors, any delays can send a site back to market and restart recruitment. For franchisees, months of work and planning can disappear because the money never lands.
The greenfield finance gap is a structural friction in franchising. It will continue slowing growth unless lenders assess the ecosystem that supports a franchisee and their business, not just the applicant alone.
Find out more about Banjo’s approach to greenfield franchise funding.
