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Why the government must stop ignoring franchises

Written by Alex Littner on Friday, 06 May 2016. Posted in Finance

With franchising’s economic contribution undervalued by politicians and many franchisees ineligible for existing SME support, it’s time for the government to step up

Why the government must stop ignoring franchises

Franchising is a great British success story. The industry made a contribution of more than £15bn to the UK economy last year – a huge 46% increase over a decade. But it could do more. Few franchisors have reached their saturation point in the UK, leaving significant room for growth.

So where is the government backing to encourage this untapped potential? Politicians say SMEs are key to the nation’s economic health, yet they rarely mention franchising. Most seem unaware that franchises are small businesses too – even if they often have large and influential parents.

Lack of financial support

As with many things, much comes down to money. A lack of finance was named as the greatest barrier to franchise growth in the latest bfa report, with insufficient capital cited as the most likely reason for franchisors to turn down would-be franchisees. Given that three out of five franchisees need to borrow money to get their business up and running, it stands to reason that access to outside capital is vital for franchise owners looking to launch and grow their operations.

But what has this got to do with politics? Surely it’s an issue for the banks? Up to a point, it is. Yet the government has the power to push those banking institutions to open up their loan books to entrepreneurs. Traditionally, the banks have looked more favourably on franchises than standalone businesses because their failure rates are lower. But, according to research by the University of East Anglia, many franchisees still express frustration that the government doesn’t work more to encourage bank lending to franchises. The financial establishment has been markedly less keen to lend to smaller companies – franchises included – since the economic downturn. This is where political influence could really improve the lot of Britain’s small business and franchising communities.

Help for some – but not all

A vast range of government funding does exist to help Britain’s small firms, from £1,500 grants towards the cost of hiring apprentices through to tax breaks for firms investing in energy and water-saving technologies via the Enhanced Capital Allowance scheme. But, unfortunately, many of the pots of cash set aside for SMEs are out of reach to those running franchises. Grants and tax perks for areas such as research and development or technological innovation are unlikely to be applicable to many franchises. As franchisees operate within established systems where the franchisor takes responsibility for any major new developments in processes and infrastructure, it means R&D usually remains within head office.

The Start Up Loans scheme is another example of where franchises sometimes lose out. This government programme offers those over the age of 18 loans up to £25,000 to get a new business off the ground but it is not open to everyone investing in a franchise system. Franchisees who buy and hold stock and earn revenue on items sold can apply but others cannot. Such exclusions are found in the small print and it is not surprising that franchise owners are often confused and frustrated when their research efforts prove fruitless. The paucity of support for franchises may be a reflection of their higher comparative success rate – less than 5% fail annually compared with one in ten firms in the general business population – but that’s scant consolation to the franchise owner who needs help.

Funding failures

One political initiative that promised to give a boost to small businesses was the Enterprise Finance Guarantee (EFG) scheme. This sees the government guarantee 75% of bank loans granted to eligible small firms. The intention is to give the financial behemoths greater confidence in lending to SMEs, and franchises that are part of a credible franchise network can apply for finance through the scheme. In his last budget – one that George Osborne insisted ‘backs small business’ – £1bn was committed to fund SMEs through the British Business Bank, with much of that money channelled through the EFG programme. But behind the headlines this project isn’t helping many businesses at all.

At the time of the Budget announcement, I pointed out that the British Business Bank’s own EFG lending figures showed just 446 companies were lent a total of £55.7m in the last quarter of 2015. Additionally, only 1,835 enterprises received EFG-backed loans during the whole of last year. When the UK boasts 5.4 million businesses, 99% of which are SMEs, one realises how small these sums are. Add to this the failure by the government to announce a definitive launch date for its bank referral scheme – a measure first unveiled in 2014 and designed to introduce businesses rejected for bank loans to alternative finance providers – and official efforts to help small enterprises begin to look tokenistic.

Reduce confusion and simplify searches

Westminster’s power is often wielded indirectly, with official funds directed to SMEs in the form of grants, tax breaks and, importantly, business advice. Despite the comprehensive guidance provided by most franchisors to their networks, more help in the form of mentoring, advice on running an enterprise and training in essential business skills are all things that many franchisees acknowledge they would find useful. Since the demise of the government advice service Business Link in 2011, many SME bosses are at a loss where to turn for authoritative help. And their bemusement is understandable.

When it comes to official sources of support, both financial and general, the picture is fragmented, with many schemes administered at a regional or local level. The government’s main online portal does have a list of possible sources of funding and guidance but the onus is on the business owner to do the hard work, trawling through hundreds of grants, funds and schemes for what might suit them. Again, a franchisee might wade through this information only to find they’re not eligible in most cases.

Finding new types of funding

The irony is that help is available for small firms and franchises that want to grow. Alternative finance – which encompasses short-term lenders, invoice finance providers, crowdfunders and peer-to-peer platforms – has the capital to lend to SMEs but has yet to reach large swathes of the small business community. Government intervention of the type outlined in the proposed bank referral scheme could make this important shift. This would be official support of an indirect sort but one that could prove extremely effective in producing the desired outcome – better-funded, flourishing businesses that contribute yet more to the country’s prosperity and success.

In many respects, the franchising industry is doing well on its own – the evidence of its success is there for all to see. But its growth could be phenomenal with additional government help. Franchising deserves more official recognition than it currently receives and should certainly get more targeted support. The powers-that-be could push the banks harder to lend, whilst also encouraging SMEs to engage with new funding providers. Solutions are available – what we need now is a little political will to action them.

About the Author

Alex Littner

Alex Littner

Littner certainly has pedigree when it comes to finance. Currently managing director at Boost Capital, a business funding company, he previously spent eight years at American Express working on its Small Business Card Portfolio across EMEA, Asia-Pacific, Latin America and the Caribbean. Away from work, Littner is a family and football man: he has a two-year-old daughter and an Arsenal season ticket.

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