John Paul

Microfinance and MicroFranchises: A Perfect Marriage?

Microfinance: Very small loans provided to the poor to provide capital for starting a very small business.

MicroFranchise: A small business that can easily be replicated by following proven mentoring, marketing, and operational concepts found in formal franchises.

Put them together, and you have an easy way to promote economic development: by creating sound replicable business models that can be financed and managed easily by entrepreneurs at the base of the pyramid. This was one of the ideas put forward last Friday at a MicroFranchise Learning Lab presented by BYU’s Center for Economic Self Reliance.

Microcredit is a proven poverty reduction tool, providing the necessary capital for entrepreneurs to start their own businesses and lift themselves out of poverty. But not all people are entrepreneurial. And not all entrepreneurs have the necessary training and skills development to start and manage a successful business. That’s where microfranchising adds value – as a ?turn-key? business, a microfranchise can rely on the franchisor, who reduces the risk of failure by providing high quality initial and ongoing training.

The franchisor also serves as a forward-thinking partner, more able to concentrate on marketing and growth, particularly as it relates to the businesses? integration into the global economy. The frachise network’s scale allows it to tap new markets that would otherwise be unattainable to an independent entrepreneur. Innovations developed by one franchisee can also be quickly replicated throughout the entire network. Additionally, being a part of large network allows the microfranchise to financially benefit from economies of scale when purchasing its supplies through the franchisor.

Safely under the franchise network’s umbrella, entrepreneurs–even those who aren?t particularly entrepreneurial–are able to succeed and thrive in ways not possible by going it alone. That fact was backed up by an interesting statistic: in the US, 80% of independent businesses fail after 5 years, while 80% of franchises are still going strong after the same amount of time. In poorer countries that offer fewer resources to entrepreneurs, this converse relationship is likely to be even more pronounced.

That’s not to say that microfranchise networks don?t have their own problems. Distribution, quality control and data collection are difficult, particularly in less developed rural areas. Competing priorities and products, and maintaining control over pricing can also be challenging.

Despite such difficulties, several microfranchise networks have already demonstrated their viability. On hand at the Learning Lab was Wayne Farmer of the Healthstore Foundation, whose network of 65 franchised health outlets in Kenya serve more than 400,000 patients a year, and Graham Macmillan of the Scojo Foundation, whose network of 400 franchised entrepreneurs have sold more than 20,000 inexpensive pairs of reading glasses in four countries. Stephen Gibson of the Academy for Creating Enterprise also spoke about his efforts in the Philippines to train microfranchise entrepreneurs.

So are microfinance networks and microfranchise networks the perfect marriage? The easy answer is yes: microfranchises need capital to start a business and microfinance institutions provide capital to start a business. But look a little closer and an even bigger opportunity becomes apparent: the ability to quickly scale operations, not only domestically but internationally as well. Large microfinance networks, like ACCION and FINCA International, are present in more than a dozen countries, giving their microfranchise partners easy inroads into new markets, and idea enthusiastically put forward by John Hatch, founder of FINCA. Additionally, microfinance networks are filled with people who have already proven themselves to be reliable borrowers and entrepreneurs, providing a partner microfranchise organization with a huge pool of qualified people to integrate into their network.

For those interested in learning more about microfranchises, check out this excellent piece by Kirk Magleby: MicroFranchises as a Solution to Global Poverty. He has also produced a catalog that outlines 60 existing microfranchising opportunities.