Franchise Finance and Falling Property Prices

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Now that the cloud of the senate inquiry into franchising has cleared, activity in the sector is starting to rise once again, and as many franchise businesses look for opportunities to expand and grow, they are also looking for finance to facilitate this. A recent SME Growth Index has revealed that Australia’s SME sector has more businesses geared for growth than it has since 2016, with an outstanding 51% forecasting revenue growth in the next six months.

 

This exciting time for Australia’s small business owners, franchisees in particular, has seen many SMEs seeking finance to fuel their growing business aspirations. The index identified that almost 60% of small business owners are looking to access additional finance to support their forecasted growth. However, a recent decline in property prices has left applicants with less equity available to secure their funding, meaning that there is rising demand for unsecured finance options.

Currently, there is little ability for SMEs to access loans that aren’t secured with property from the banks, driving a shift away from such traditional lenders. This is reflected by a drop in the number of small business owners who plan to turn to their bank for finance, and has resulted in a subsequent 18% rise in the number who cite alternative lenders as their first choice.

Whilst it is widely acknowledged that small alternative providers can’t offer the same interest rates as the banks, in the current lending climate this is of little worry to small business owners. A whopping 91% surveyed as part of the SME Growth Index said they would be willing to pay higher interest rates to avoid putting their homes up as security, and 61% of those reinforced the sentiment said they would ‘definitely’ make the trade-off. The percentage of SMEs willing to pay more to avoid property security has more than doubled in recent years, indicating that decreasing house prices are adding significant pressure to the sector.

Despite the promising growth indicators of the franchise industry, many are feeling a sense of dread about the looming market conditions. Although 35% of people said they hadn’t yet felt the impact, they are expecting the changes to property prices to affect their lending abilities in the near future. Whilst the growth sentiment represents a much needed boost for the nations franchisees, its timing with the poor property outlook means that we are unlikely to realise its full potential.

However, the resilient spirits of Australian franchisees will not let this hold them back. Many are making moves to build partnerships with reliable alternative finance providers, who are catering to the unique needs of small business owners. Offerings such as fast credit approval rates and easy application processes were cited as major draw cards for 98% of SMEs, as well as the option not to risk their home in the fund raising process. This suggests that we will see a drop in the number of SMEs which rely on property based security for their business finance, with a shift towards asset security instead.

In 2019 we can expect to see Australian franchisees, and other small business owners, turn to alternative finance providers in order to capitalise on the strong growth projections for the sector. Despite the challenges that rising real estate prices create for property backed funding, the options available from alternative lenders which utilise asset based security will help bridge the gap, and provide SMEs with the finance they need to grow their business.

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