Buying a Franchise in Colombia: How to Assess Your Loan

Financing a franchise purchase is not simply a matter of securing bank approval. The loan must fit your opening timetable and the business’s realistic ability to repay it. Before joining a franchise network in Colombia, check how the borrowing and the franchise agreement fit together: a delayed opening could leave you making repayments before you have earned any revenue.

1. Separate loan approval from the purchase decision

Approval from a financial institution does not certify that the franchise will be profitable. The lender assesses the risk of recovering its money; you must assess whether you can service the debt, keep the business running and earn a reasonable income.

Before accepting an offer, establish who will be the borrower: you as an individual or the company operating the business. If you take out a personal loan and transfer the funds to your company, work with your accountant to document whether they constitute a capital contribution or a shareholder loan. This decision has accounting and tax implications.

Ask for a written proposal specifying:

• The approved amount and the net amount you will receive.
• The permitted uses of the funds.
• Any outstanding conditions for releasing the funds.
• How long the approval remains valid.
• The date from which interest accrues and repayments begin.

If the franchisor recommends a lender, compare other options. That recommendation is no substitute for an independent assessment and does not guarantee preferential terms.

2. Compare the full cost, not just the repayment amount

A lower repayment may conceal a longer loan term or a substantial balance due at the end. Request an amortisation schedule and compare offers for equivalent amounts and terms.

Check the effective annual interest rate. If the rate is variable, identify the benchmark, the additional margin and how often it is adjusted. Ask for an illustration of how repayments would change if the rate rose; do not compare only the first monthly payment.

Include insurance, fees, assessment charges and any other applicable costs. Ask which are deducted from the funds released and which are paid separately. The approved amount is not always the amount available to invest.

It is also worth clarifying three points:

• Grace period: whether it defers principal, interest or both, and how the deferred amounts are collected later.
• Early repayments: the conditions under which you can shorten the term or reduce the repayment amount, and which legal rules apply.
• Arrears: the interest and charges that may arise if you fail to meet your payment obligations.

Do not assume that every form of financing offers the same rights. Ask for the relevant terms to be included in the loan documents.

3. Coordinate the release of funds with franchise payments

Prepare a schedule matching each payment obligation to a confirmed source of funds. Include the initial franchise fee, equipment and fit-out costs solely to identify when you need the money, rather than to rebuild the entire business budget.

Problems arise when the franchisor requires payment before the bank can release the funds. The reverse can also happen: you receive the loan and start paying interest while waiting for the approvals or deliveries needed to open.

Negotiate dates and verifiable milestones. Where feasible, propose making certain payments conditional on final loan approval or the release of funds. The franchisor is not obliged to accept this condition: it must be expressly agreed.

If the franchisor offers direct financing, request a document that distinguishes the franchise price from the financing cost. Check what happens to that debt if opening is delayed or a contractual breach occurs. Do not assume that a dispute suspends repayments.

4. Test your ability to repay during difficult months

Work with your accountant to prepare a monthly cash flow forecast after operating expenses and tax obligations, but before debt service. Compare it with the principal, interest and charges payable each month.

Test specific scenarios: a delayed opening, lower-than-expected sales, late customer payments and interest rate rises where applicable. Assess the months when cash is tightest, not just the annual result.

Accounting profit is not the same as available cash. A business can show a profit yet lack the money for a loan repayment because funds are tied up in stock or receivables. If the loan can only be repaid under the most favourable scenario, reconsider the amount, the term or the decision to borrow.

5. Understand which rules protect you

Colombia has no specific franchise law or mandatory franchise disclosure document with generally prescribed content and delivery deadlines. As Colombia’s Ministry of Justice explains, franchising is an ‘atypical’ contract: it is governed by the agreed terms, the general provisions of the Commercial Code and Civil Code, and duties of good faith. Law 1429 of 2010 is not a franchise law.

Lending has its own legal framework. If you borrow from an institution supervised by Colombia’s Financial Superintendence, the financial consumer protection regime under Law 1328 of 2009 is relevant. Direct financing from the franchisor is not automatically subject to that same regime.

As a practical step, have the loan offer, repayment schedule and franchise agreement reviewed together. Sign once the dates align and you can explain how you will make repayments even if opening or sales are delayed.