Tool franchise Snap-on Tools Australia has established a private funding offering in a bid to attract franchisees, effectively cutting out traditional lenders in the franchise market.
Operating in Australia for more than 20 years, Snap-on Tools imports and distributes automotive hand tools, power tools, tool boxes, tool storage and automotive diagnostic tools.
The Snap-on Tools Australia Credit Program was launched in mid 2011, in response to the major banks’ tough lending criteria and the ongoing uncertainty surrounding interest rates.
To date, more than 10 new franchisees have taken up the offer, representing a third of the company’s yearly franchisee intake.
Snap-on believes the program could be the start of a new trend, whereby franchisees bypass traditional lenders in the franchise market in favour of internal funding opportunities.
According to Nick Hudson, Snap-on Tools national franchise manager, “we are witnessing a changing economic paradigm in retail, and particularly in franchising internationally”.
“There is pressure on the retail model – from a softening in demand for product, right through to a restriction on lending for people interested in investing in a franchise,” Hudson says.
“We decided to circumvent this and inject much-needed funding into the system ourselves.”
Hudson points out that entry prices for many Australian franchises can range from $200,000 to $1 million, so potential franchisees are often reliant on lenders in order to make an investment.
While the investment required for a Snap-on Tools franchise is at the lower end of the scale ($40,000), securing access to funds remains a significant barrier to entry for potential franchisees.
According to Hudson, the creation of a credit program was a straightforward solution.
“We have accreditation with the major banks. We are a reputable and solid business turning over $67 million last year in Australia alone,” he says.
“We are in the position to provide finance sourced purely from the Snap-on network. In the majority of cases, there is no need for a bank to become involved in a franchisee’s decision.
“Prior to the commencement of the credit program, our franchisees have typically been at the mercy of bank variable interest rates.
“The program provides fixed interest rates, no ongoing fees or additional charges to franchisees, and our credit is unsecured except for a lien against the assets of the franchise itself.”
Franchising expert Jason Gehrke says while the majority of franchisees are still bank-funded, the banks will become more cautious about what they fund and how much they fund.
“With the uncertainty of the European situation, if bank lending is slowing down, the chances of people being able to start a franchise will be more difficult,” Gehrke told StartupSmart.
“All of the big banks… will look at certain systems and, if they meet the benchmarks, will offer preferential lending arrangements to franchisees of those systems.”
“[However, there will be] some kind of cap on the amount of money or the number of loans to be written to any given system.”
Gehrke believes internal funding is just one of the future funding models that the franchising industry can expect to see more of, identifying family funding as another popular model.