What Will Franchise Finance Look Like in 2020?


After Australia’s lending landscape undertook significant changes throughout 2018/19, many franchisees and franchisors are thinking about what their finance options will look like in 2020. The aftermath of the banking royal commission left many business owners struggling to access funds, as the banks tightened their lending conditions in an effort to be more risk-averse.

However, during this period the need for finance did not cease, and many within the industry began looking elsewhere for funds. As a result, we began to see heavy adoption of alternative providers in tandem with a shift in what consumers value. After a culture of dishonesty and misleading terms was exposed among traditional lenders, consumers moved their priorities to lenders which displayed transparency and honesty.



The rise of relationship-based lending

In the past consumers displayed an undying brand loyalty to their banks. Once they opened their first bank account, people often didn’t look elsewhere when it came to their home loan, personal loans and even business loans. While relationship-based lending is the philosophy that drove this loyalty, as Australia’s big banks grew in scale, the concept was somewhat left behind.

In 2018 Martin North, Director of Digital Finance Analytics, said ‘Irresponsible lending is endemic in Australia’. This was followed by an ASIC crackdown on non-compliant lenders, who were not meeting responsible lending requirements. The perception that financiers were trying to maximise their revenue, even if that meant making reckless lending decisions, was widespread among the public.

After 12 months of tightened lending conditions and uncertainty surrounding the credibility of the country’s most prominent financiers, consumers are analysing the relationship they have with their finance providers more than ever. However, the one thing that has changed is people’s approach to brand loyalty. Consumers have access to more information than ever before, and because of this, they realise that a company which is a good fit for their personal banking, might not be right for their business affairs. Franchisees do not necessarily want to lump their personal finances with their business finance. As a result, many are looking to build independent relationships with lenders who fit the needs of their business.

Alternative finance becomes the norm

In 2017 Equifax reported a 68% growth in commercial demand for alternative lenders, and the highest adoption rates were among SMEs who accounted for 98% of all alternative finance enquiries. This trend has continued, with the popularity of innovative and out of the box finance sources rising.

Even though alternative lenders have been around for quite some time, there has been a steep increase in adoption over the past five years. As borrowers begin to see such providers as a realistic options, the feedback to their offerings has been overwhelmingly positive. In 2018 Medici reported an approval rating of 55-60 per cent for alternative providers, compared to just 23-27 per cent for banks. Finance is not a one size fits all solution, and while banks excel in meeting the needs of big business, this data suggests that Australia’s vast small to medium enterprise (SME) network is finding the support they need from non-traditional options.

As well as alternative lenders, other innovative solutions such as crowdsourcing, peer to peer lending and microloans have become more mainstream. Recent data found that the playing field between banks and alternative lenders has levelled, citing an 18 per cent increase in the number of SMEs choosing alternative providers as their first choice.

Ultimately it appears that small business owners, franchisees included, are leading a new direction for Australia’s lending landscape. We are experiencing a shift away from a centralised model, with the big four banks at its core, to a more diversified selection of lenders.

The new challenge

A recent SME Growth Index shows that more of Australia’s SMEs are positioned for growth than the country has seen since 2016, with a 51 per cent forecasting revenue growth over the next six months. However, this same report suggests that these strong growth targets cannot be achieved due to barriers to finance.

Australia’s volatile property market is making it difficult for many small business owners to access the funds they need to meet their aspirations. Despite the fact that almost 60 per cent of small business owners are seeking access to funds, the timing of tumultuous market conditions has meant that many are feeling uneasy about their ability to do so. A decline in property prices means that applicants have less equity to source when trying to secure finance, driving demand for unsecured finance options.

The franchise industry now faces a new challenge, sourcing funding options to support the growth of its networks that also meet the unique needs of their franchise partners. Alternative finance options are set to play a significant role in overcoming this challenge. While it’s acknowledged that such providers are unable to match the low-interest rates of the bank, in the current lending landscape, this is not applicants main concern. Instead, an outstanding 91 per cent of those surveyed in the SME Growth Index stated they would be willing to compromise on a rate to avoid risking their home as security. A further, 61 per cent said they would ‘definitely’ make the trade-off, which is double the number of recent years.

This research shows that the option of property-based security is deeply unfavourable for small business owners, meaning we will likely see a decline in the number of SMEs who are choosing the property backed funding favoured by banks. Already asset-based security options offered by non-traditional lenders are beginning to bridge this gap.

These statistics reflect how the industry is adapting under the pressure of changing market conditions. Nevertheless, as the needs and wants of consumers evolve, new and innovative offerings continue to become available. Australia’s franchise networks are determined to capitalise on the strong growth projections for the sector and will continue to explore the wealth of new funding options available to them.

This is just a snapshot of what we can expect in the world of franchise finance throughout 2020. Borrowers are placing a high value on characteristics such as flexibility, transparency and unique funding solutions. Traditional banks continue to play a vital role in Australia’s lending economy, but alternative finance providers are solidifying their place in the market. Overall, Australia’s small business network is geared for significant growth, and if current challenges in accessing funds can be overcome, this growth will be realised.

Seeing a gap in the market, James founded Cashflow It Group in February 2014. Spending almost a decade as a successful multi-unit franchisee, it is his experience as a franchisee that ensures Cashflow It Group meets its customers needs better than any other equipment finance company in Australia.

Franchise Finance Australia is a specialist funder to the franchise sector, with unrivalled knowledge of franchisees funding requirements. Founded by directors with a background in franchising, we have remained committed to offering flexible funding solutions that allow franchisees to grow their business.