Buying a franchise: how to make the agreement conditional on loan approval

The bank is still considering your loan application, but the franchisor wants you to sign to secure your place in the franchise network. This is the point at which you need to distinguish clearly between an intention to buy and a commitment you may be unable to finance. The answer is not a verbal promise that you will ‘work something out’, but precise contractual terms covering what happens if financing is approved, refused or delayed.

Why a loan application is not secured financing

Submitting a loan application, receiving encouraging initial feedback from a bank and obtaining final loan approval are not the same thing. Even after approval, there may be conditions you must meet before funds are released, such as providing further documents or putting security arrangements in place.

When buying a franchise, it is therefore not enough to ask: ‘Will I get the loan?’ It is more important to establish when the money will actually be available and on what terms. If the franchise agreement requires payment before then, you are taking on an obligation that the loan may not cover in time.

Before negotiations, prepare a brief overview of:

• how much of your own money you can invest without further borrowing;
• how much the bank needs to provide;
• which costs the bank is willing to finance;
• which document confirms approval and which confirms that you can draw down the loan;
• what might delay the release of funds.

In particular, check whether the bank requires a signed franchise agreement before making its final decision. If it does, establish in advance with both the bank and the franchisor whether they will accept an agreement whose effect is conditional on financing. Otherwise, you could find yourself caught between two requirements that cannot be met at the same time.

Croatia’s legal framework: protection must be written into the agreement

Croatia has no specific franchise law or mandatory franchise disclosure regime requiring a standard pre-contractual disclosure document and waiting period. Franchise agreements are governed primarily by the Croatian Obligations Act, including its rules on contract formation, conditions, performance of obligations and good faith.

Depending on the nature of the relationship, other general legislation also applies, such as the Croatian Competition Act and relevant European Union competition rules. These do not, however, give a franchise buyer a general right to withdraw because a bank has refused a loan.

The Croatian Chamber of Economy’s franchise register is an information resource on available franchises, not a mandatory state registration scheme that guarantees financing or the security of an investment. Nor does membership of a franchise network itself replace contractual protection.

Discuss a suspensive condition with a lawyer: certain effects of the agreement arise only once a clearly defined financing-related event occurs. Another option is an agreed right to terminate if financing does not materialise. These options do not have the same consequences. The agreement must expressly state which obligations apply immediately and which apply only once the condition has been met.

Define the loan terms that will actually make the purchase possible

Wording such as ‘the agreement is valid if the buyer obtains a loan’ leaves too many questions unanswered. The bank may approve less than you need or offer terms you cannot accept. The franchisor could then argue that financing has been approved, even though the investment is not viable.

During negotiations, define at least the following:

• Required amount: the minimum financing needed to make the agreed investment.
• Acceptable terms: for example, the maximum acceptable wait for funds to be released, the required repayment period and limits on financing costs.
• Security requirements: what you are prepared to offer as security and which additional bank requirements you will not accept.
• Evidence that the condition has been met: whether the bank’s approval is sufficient or whether the conditions for drawing down the funds must also be satisfied.
• Final deadline: the date by which financing must be confirmed or available.

For example, approval of only part of the amount needed may not be enough to get the business open. The agreement should specify whether you must cover the shortfall yourself or whether such a decision means the financing condition has not been met.

If your plan includes public funding, check the current terms of the specific scheme. Do not assume that franchise purchases remain eligible simply because they were eligible in the past. A funding award, the eligibility of an individual cost and the release of funds are also separate stages.

Agree a procedure for a delayed or negative decision

The protection should be workable and fair to both parties. The franchisee can undertake to submit a complete application on time, respond to the bank’s queries and notify the franchisor of the decision. The franchisor can undertake to provide information about the franchise model that the bank reasonably requests.

Agree how notices will be given, what evidence of refusal is acceptable and whether the deadline can be extended. Avoid an open-ended obligation to apply to other banks after every refusal. Also specify whether the franchisor may offer the same business opportunity to someone else while you wait.

Most importantly, put the consequences of unsuccessful financing in writing: whether obligations end automatically or require notice, what happens to sums already paid and who bears any preparation costs approved in advance. Align the opening deadline too, so that you are not already behind schedule before the funds become available.

Practical takeaway: before signing, review three things together — what the bank regards as approved financing, what the agreement regards as fulfilment of the condition and what you owe if the money is ultimately unavailable.