Buying a Franchise in Colombia: How to Assess a Loan

Buying a franchise with a loan commits future income that has yet to materialise. In the franchise sector, a recognised brand may help open discussions with lenders, but it is no substitute for assessing the business. Before taking on debt, check how much cash the loan will require, which assets will be at risk and whether the funds will be released when you actually need them.

1. Separate loan approval from the decision to buy

A lender’s willingness to lend does not prove that the franchise can service the debt. The lender may rely on your personal income, security or co-borrowers, whereas you need to establish whether the outlet will generate enough cash on its own.

Prepare a table showing each planned payment and its funding source: your own funds, a loan or finance offered by the franchisor. Do not treat a pending application, a commercial discussion or an approval subject to unmet conditions as available funds.

Ask the lender for a written proposal that answers the following questions:

• Who will be the borrower: you or the company operating the franchise?
• Which costs can the loan cover, and which must you fund yourself?
• Which documents and security arrangements are required before the funds can be released?
• When does the approval expire, and what could change its terms?
• Will the money be paid to the applicant or directly to suppliers?

If the brand recommends a lender, compare other offers. A commercial partnership does not necessarily mean better terms, nor does it mean that the franchisor is liable for the loan.

2. Compare the full cost and repayment schedule

Do not choose solely on the basis of the advertised repayment amount. Request the repayment schedule, an interest rate expressed on a comparable basis and a breakdown of associated charges. Distinguish between interest, compulsory insurance, fees and the costs of putting security arrangements in place, where applicable.

If the rate is variable, identify the benchmark rate, the additional margin and how often the rate is adjusted. Ask for an illustration using a higher rate: a commitment that is manageable when you sign may become burdensome later.

Pay particular attention to any grace period. A grace period does not necessarily mean no payments or waived interest. Ask whether interest is payable during that time, whether it accrues and how the outstanding balance changes. Also compare the early repayment terms applicable to the specific loan.

Next, incorporate the loan repayment schedule into a monthly cash flow forecast. Include the franchise’s operating costs and contractual payments before calculating how much is available to service the debt. Do not confuse accounting profit with cash available for repayments.

Test three potential difficulties: a delayed opening, lower initial sales and slower collection of customer payments. If you need a second loan to cover the first repayments, reconsider the amount you are borrowing, your own contribution or the purchase itself.

3. Establish the scope of security and your personal exposure

Financing may put assets outside the business at risk. Read the loan agreement, promissory note, letter of instructions and security documents separately. Request complete copies and keep the signed versions.

If you are asked to sign a promissory note with blank spaces, have the instructions for completing it reviewed. They should make clear which amounts or items may be entered and in what circumstances. Do not treat these documents as a minor formality compared with the franchise agreement.

If a co-borrower is involved, clarify their liability. Depending on the agreed terms, the lender may be able to demand payment from them without first exhausting the operator’s assets. Similarly, setting up a company does not automatically protect your personal assets if you guarantee its obligations.

Seek legal advice to establish whether the security covers only that loan or other obligations as well. Check how it can be released and what happens if you sell the outlet. Leaving the franchise does not, in itself, discharge the bank debt.

4. Coordinate the loan with the franchise agreement

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no comprehensive, franchise-specific legal framework governing the relationship. Validly agreed contractual terms apply, alongside the general rules of the Commercial Code and, where relevant, the Civil Code. The loan remains subject to its own legal framework; where a supervised financial institution is involved, financial consumer protection rules, such as Law 1328 of 2009, are also relevant.

Do not therefore assume that a loan refusal automatically allows you to cancel the purchase. Explicitly negotiate what will happen if financing is not approved or the funds are not released by a specified date, and which payments would be refundable. Also check whether the agreement restricts borrowing or the use of business assets as security.

Practical conclusion: proceed when you have a documented finance offer, repayments you can afford even under difficult conditions and security arrangements whose scope you understand. Financing should fit the business, not force you to buy before you are ready.