Franchise Finance in China: Check Borrowing and Guarantee Liabilities Before Accepting Brand-Recommended Funding

“If you are short of funds, head office can arrange a loan” may help you launch a franchise sooner. It may also leave you in debt before the outlet has even opened. In franchising, brand-recommended finance is simply a source of funding, not a repayment safeguard. Before deciding to borrow, review the franchise agreement, loan agreement and guarantee documents together, rather than focusing solely on monthly repayments.

1. Establish who borrows, who lends and who bears liability

Ask the franchise sales representative for the actual lender’s full legal name, details of the financing product and the complete contract. The franchisor, lender and finance broker may be three separate entities. A sales representative’s reference to “head office finance” does not establish who provides the money or whether that entity is authorised to conduct lending business.

Use publicly available information from financial regulators to verify that the lender holds the relevant authorisation, and confirm the referral relationship directly with the lender. Do not apply solely on the strength of screenshots or QR codes sent by the brand, or a broker’s verbal explanation.

Pay particular attention to these three arrangements:

• Personal borrowing to open an outlet: Even if a company signs the franchise agreement, you may still be the debtor under the loan agreement.
• Company borrowing with a personal guarantee: Shareholders or operators may assume liability by signing separate guarantee documents. Do not rely solely on the protection of the company’s limited liability.
• Equipment leasing or instalment payments: Even if the arrangement is not called a “loan”, check the payment obligations, ownership of the equipment and the cost of exiting early.

Do not give sales representatives SMS verification codes so that they can sign on your behalf. Nor should you cooperate in fabricating the purpose of a loan, income figures or transaction records. The stated use of funds in the contract must match their actual use.

2. If the franchise falls through, the loan does not automatically disappear

Mainland China has specific franchise regulations. Article 21 of the Regulations on the Administration of Commercial Franchising requires franchisors to provide the statutory disclosure information and the contract text in writing at least 30 days before the agreement is signed. Article 22 requires disclosure of matters including the types, amounts and payment methods of franchise fees. The Measures for the Administration of Information Disclosure in Commercial Franchising set out more detailed disclosure requirements.

These rules help you assess franchise expenditure, but they do not replace a review of the financing contract. Borrowing and guarantee liabilities are also governed by legislation including the Civil Code of the People’s Republic of China. The franchise agreement and loan agreement usually create separate legal relationships: terminating the franchise agreement does not automatically terminate the loan agreement. The position will depend on the contractual structure, the relationships between the parties and how the agreements have actually been performed.

Be particularly cautious where loan funds are paid directly to the franchisor. The fact that the money never reaches your account does not mean you have no repayment liability. If a suitable site cannot be secured, or the parties terminate the franchise agreement, a delay in the franchisor’s refund may still leave the lender entitled to demand repayment under the loan agreement.

Before signing, seek written confirmation from the relevant parties of:

• Which franchise conditions must be met before funds can be released, and who checks that they have been met;
• Who receives the refund directly if the project is cancelled, and how it reduces the outstanding loan principal;
• Who bears the interest, service charges and early repayment charges incurred between disbursement and refund;
• Whether clear remedies are in place if the franchisor fails to refund the money on time.

A promise signed only by the franchisor that “you will not need to repay the loan once the franchise fee is refunded” does not automatically bind a lender that was not party to that arrangement.

3. Look beyond “low monthly repayments” to the full financing cost

Ask the lender for a repayment schedule covering every instalment, with separate figures for the loan principal, the amount actually available to open the outlet, interest and all additional charges. Brokerage fees, guarantee fees, insurance premiums and equipment instalment charges can all affect the true financial burden.

Do not compare a monthly fee rate directly with another product’s annualised interest rate, or assume that “interest-free” means cost-free. Ask how the annualised cost is calculated. If necessary, have an independent financial professional calculate it using the actual disbursement and repayment dates. Whether a charge is lawful or payable must be assessed against the specific terms and applicable rules.

For a “brand interest subsidy”, clarify at least four points: who pays it, when it is paid, whether it depends on continued trading or meeting purchasing targets, and whether you remain liable for all interest if the brand stops paying. In your calculations, record the brand’s subsidy separately from your payment obligations to the lender.

Also check whether early repayment attracts a charge, how overdue payments are charged and which events allow the lender to demand repayment of the entire outstanding loan ahead of schedule. Do not treat a new loan that might be approved in future as a guaranteed source of repayment for your current borrowing.

4. Define your personal exposure before signing a guarantee

China’s Civil Code distinguishes between general guarantees and joint and several liability guarantees. The conditions under which a creditor can require the guarantor to pay differ between the two. Where the type of guarantee is not specified, or is unclear, the law treats it as a general guarantee. However, financing documents may expressly provide for joint and several liability, so do not rely on an intermediary’s assurance that signing is “just a formality”.

Check each element: the underlying debt secured, the amount covered, the type of guarantee and the guarantee period. Confirm whether the guarantee also covers interest, contractual default penalties and the costs of enforcing the debt. If it is a maximum-amount guarantee, check whether it may cover a series of debts arising over a specified period, rather than just the franchise loan currently under consideration.

If a spouse is asked to sign, establish in what capacity: as a co-borrower, a guarantor or simply to acknowledge a particular fact. Do not judge this solely by the document’s title, and do not assume that every spouse’s signature creates joint repayment liability. Obtain independent legal advice before mortgaging property or putting major family assets at risk.

Practical takeaway: Before paying anything, draw a simple diagram showing “who borrows, who receives the money, who refunds it and who guarantees it”, and obtain a complete repayment schedule. If any liability remains unclear—especially if there is no written arrangement for handling the loan should the franchise fail to go ahead—do not let a time-limited franchise offer rush you into signing.