Franchising in Canada: secure your funding before you buy

A lender’s interest in your project does not necessarily mean it has agreed to finance it. Before joining a franchise network in Canada, you need to align three things: the costs your funding will actually cover, the conditions for releasing the money and your commitments to the franchisor. Here is how to avoid signing up for a purchase that your funding may ultimately not allow you to complete.

1. Clarify what the bank’s approval means

An encouraging conversation with your account manager, an estimate of how much you could borrow and a written loan offer do not represent the same level of commitment. Ask the lender to confirm in writing where your application stands and which conditions you still need to meet.

Its assessment may depend on your own financial contribution, your experience, your credit history, the value of the equipment and a review of the contracts. The bank’s familiarity with the brand is no substitute for assessing your particular project.

Before treating the funding as secured, get answers to the following questions:

• What amount has been approved, for which borrowing entity, and how long is that approval valid?
• What checks or internal approvals are still required?
• Which documents must be submitted before the first release of funds?
• What security, guarantees and insurance are required?
• Would a change of location, price or ownership require a fresh assessment?

What matters is the written offer and its conditions, not a verbal promise. Ask for an explanation of wording such as ‘subject to satisfactory documentation’: it may mean that significant checks are still outstanding.

2. Match every cost to a confirmed source of funding

The total project cost and the amount eligible for financing are not necessarily the same. A lender may agree to finance certain equipment but treat the initial franchise fee, professional fees, stock, taxes or costs incurred before approval differently.

Work with your accountant to prepare a table showing, for each item, the amount supported by a quotation, the payment date, the funding source and the evidence required to release the funds. Distinguish between your own contribution, the term loan, the line of credit and any finance provided by the seller or franchisor.

Pay particular attention to how funds will be released. Will the bank pay the supplier directly? Will it only reimburse an invoice you have already paid? Will it require you to invest your full contribution before releasing the loan? Even approved funding may not be available when a deposit falls due.

If you are considering the Canada Small Business Financing Program, bear in mind that it helps businesses access credit by sharing risk with lenders. It is neither a grant nor automatic approval. The financial institution decides whether to grant the loan. Have it confirm the eligibility of both the business and each cost under the rules in force when you apply.

3. Protect the purchase with a financing condition

Your contract with the franchisor and your bank’s offer are two separate commitments. A lender’s refusal does not automatically release you from a franchise agreement you have already signed.

Before making any binding commitment, ask your adviser whether a financing condition should be included. It should define acceptable funding rather than refer vaguely to ‘obtaining a loan’. Depending on the circumstances, points to negotiate include the minimum amount, a realistic deadline, acceptable security and guarantees, and the procedure for giving notice if funding is refused.

Also clarify what happens to any money paid: which sums are refundable, what deductions may be made and how quickly a refund must be issued. If the purchase involves several contracts, their conditions should be coordinated so that one commitment does not remain binding after another has ended.

In Canada, franchise disclosure rules are set at provincial level. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 generally requires, unless an applicable exemption applies, that a disclosure document be provided at least 14 days before a franchise-related agreement is signed or any payment is made, whichever happens first. Certain exceptions are subject to specific conditions: do not assume that a deposit described as refundable falls outside these rules.

This statutory period is not a financing condition. In Quebec, where no specific franchise legislation imposes this disclosure regime, the Civil Code of Québec governs matters including contracts and good faith. Have the rules in the relevant province checked before signing or paying anything.

4. Coordinate the final steps before funds are released

Draw up a shared timetable with the lender, the franchisor and your advisers. It should align the deadline for securing funding, the expiry of the bank’s offer, payment due dates and the planned completion date for the purchase.

Before completion, ask for confirmation of any conditions that remain outstanding. Tell the lender about any significant changes to the project: an increase in fit-out costs or a change in legal structure may require its approval.

Key takeaway: do not commit solely on the strength of a quoted funding amount. Insist on a written offer, check how the funds will be released and have your financing conditions coordinated with your purchase contracts.