Franchisee financing in Colombia: the limits of support

When you decide to franchise a business in Colombia, some prospective franchisees may need a loan to join your network. Introducing them to a lender can make the process easier, but it does not mean guaranteeing approval or accepting responsibility for their debts. Before offering this support, define what your company will do, what the applicant must handle and which commitments the franchise network will not take on.

1. Define the scope of your financing support

Support might involve providing information about the business model, explaining when funds will be needed or introducing applicants to lenders. These activities are different from lending money, guaranteeing an obligation or negotiating loan terms on the applicant’s behalf.

Prepare a written description of the service. It should identify who is responsible, which documents are available and the limits of their involvement. For example, head office provides an indicative opening budget and explains its assumptions, while the applicant submits the loan application and answers questions about their assets and income.

Distinguish between three situations:

• Business introduction: you share a contact, without any commitment that finance will be approved.
• Documentation support: you help explain the components of the investment, without certifying the applicant’s creditworthiness.
• Financial involvement: you lend funds or agree to a guarantee arrangement, which requires an independent legal and financial assessment.

Do not describe the first two as ‘guaranteed financing’. If you have an agreement with a bank, check what it actually offers and avoid presenting an opportunity to have an application assessed as an approved loan.

2. Provide useful information without taking the applicant’s place

A lender may need to understand what the franchisee is acquiring, how the outlet will operate and what financial commitments they will have. Your contribution should explain the business, not create an impression of creditworthiness that the applicant does not have.

Put together an information pack consistent with your franchise offering: a description of the format, estimated investment, included and excluded costs, the planned opening timetable and payments to the franchisor. Specify which amounts are quotations, which are estimates and which depend on decisions yet to be made.

If you provide historical information from company-owned outlets, identify the period covered and the operating conditions. Do not present it as a guaranteed outcome for the new outlet or as proof that it will be able to meet any level of loan repayment.

Ask the applicant to prepare, with their adviser, a cash flow forecast incorporating the actual loan terms: drawdown, interest, fees, repayments and any grace periods. Your support should help them understand the obligation, not downplay it.

It is also worth modelling a delayed opening or lower-than-expected initial revenue. If debt repayments are only affordable in the most favourable scenario, the financing structure needs reviewing before you proceed.

3. Keep the loan separate from the franchise agreement

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no comprehensive legal framework specifically governing it. It is governed by the terms validly agreed between the parties and the applicable general rules, particularly the Commercial Code and, where relevant, the Civil Code. Freedom of contract does not allow parties to disregard mandatory rules or the duty of good faith.

Nor is there a general franchise-specific system of mandatory pre-contractual disclosure equivalent to those in some other countries. The draft decree published by the Ministry of Commerce, Industry and Tourism in 2021, which proposed an offering circular and a period of twenty working days, should not be presented as a current legal requirement simply because it was published.

When it comes to financing, clearly distinguish the franchise agreement from the loan and any guarantee. The franchisee runs their business using their own funds or finance obtained under their own responsibility; the franchisor does not automatically become a debtor by making a banking introduction.

Before signing documents requested by a lender, check whether they impose obligations as a co-debtor, surety or guarantor, including as an avalista under Colombian law. These are not merely acknowledgements of support, and their effects require professional review.

4. Decide what happens if the finance does not come through

Design your sales process so that it does not depend on uncertain approval. Before making commitments that are difficult to reverse, identify who will confirm that funds are available and what evidence will be sufficient.

Set out in writing what happens if financing is refused, delayed or approved for a lower amount. If the transaction is conditional on securing a loan, define that condition, its deadline and its consequences with legal advice. Do not assume that a bank’s refusal automatically cancels obligations already signed up to.

Avoid pressuring applicants to cover a shortfall with additional borrowing without reviewing their ability to repay. Likewise, do not turn an exceptional loan from head office into a routine practice without assessing the risks and requirements.

Practical takeaway: before offering financing support, prepare a one-page document setting out what you will provide, its limits and the decisions that remain subject to bank approval. Helping a franchisee access finance can support a responsible start to the relationship; guaranteeing it without assessing the consequences can put both businesses at risk.