Buying a franchise: making your commitments conditional on securing a loan

You have chosen a brand, and the bank has given a preliminary indication that funding looks feasible. This is precisely when an awkward gap can arise: the franchise agreement may already commit you to investing, while the loan may not yet be approved or available to draw down. Plan your entry into the franchise network so that your obligations to the franchisor reflect when the money will actually be available, rather than an optimistic timetable.

Distinguish between an indicative offer, approval and access to funds

A preliminary offer from a bank is not the same as a signed loan agreement. Yet even a signed loan agreement does not, on its own, mean you can immediately pay for your initial investment. The drawdown conditions, timing and purposes for which the bank will provide funds also matter.

Depending on the financing arrangement, the bank may require evidence of your own funds, security, a lease or documents relating to the equipment you intend to buy. Also check whether it will pay invoices directly to suppliers or allow reimbursement of expenses you have already paid. An expense the bank accepts as eligible may not be financeable at the point when you need to pay it.

In particular, obtain written confirmation of:

• which elements of the initial investment can be paid for from the loan;
• how much of your own money you must contribute, and when;
• which documents are required before the first drawdown;
• the deadline for drawing down the loan and what happens if there is a delay;
• whether changes to the budget or opening date require fresh approval.

Pay particular attention to the initial franchise fee, fit-out works, stock and VAT. Do not assume that the bank will automatically include all these items in the same financing package.

Czech law does not automatically protect you if your loan is refused

The Czech Republic has no specific franchising legislation. A franchise agreement is usually an innominate contract — a type of contract not specifically defined by statute — under section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General contract law applies, along with rules governing matters such as licensing, sales or leases, depending on the agreement’s content. A bank loan is governed by the loan agreement and the relevant general legislation.

Nor is there a specific statutory duty to provide prospective franchisees with a standardised franchise disclosure document. General pre-contractual disclosure duties and rules on good-faith conduct do apply, however. These are no substitute for checking the financing yourself or negotiating contractual protection if it falls through.

The refusal of a business loan does not, in itself, usually release you from your obligations to the franchisor. If you sign an agreement without appropriate provisions, a lack of funds may remain your business risk. Do not assume you have an automatic consumer right to withdraw either: you are buying the franchise for business purposes.

Discuss with a lawyer whether to make the agreement taking effect conditional on financing, make only selected obligations conditional, or include an express right to terminate if funding is not secured. These options have different consequences, particularly if training or work on the premises is already under way.

Financing provisions must be objectively verifiable

A sentence such as “the agreement is valid once a loan has been obtained” is too vague. It does not make clear whether a bank’s approval, a signed loan agreement or fulfilment of the conditions for the first drawdown is required. Nor does it address what happens if the bank offers less money than you need.

Bring specific parameters to the negotiations. The provision should specify the amount required, the deadline, how the outcome will be evidenced and, where appropriate, acceptable limits on borrowing costs or security requirements. The aim is not to let you reject any loan on a whim, but to avoid being bound by an offer that does not actually fund the project.

Also agree what you must do to support the process: when you will submit a complete application, how you will document its progress and when you will notify the franchisor of the decision. This gives the franchisor a predictable process and avoids leaving you dependent on its goodwill later.

Address the financial settlement separately. Which payments will be refunded if financing falls through? Who will pay for training already delivered or design work for the premises? Are those costs capped in advance, and do they require your consent? A right to terminate without a contractual penalty does not necessarily mean that all payments will be refunded.

Coordinate the bank, the franchisor and other suppliers

Protection in the franchise agreement does not automatically extend to your landlord, building contractor or equipment supplier. Prepare a simple overview showing, for each commitment, the signing date, payment due date, source of funds and consequences of cancelling the order. Highlight payments that fall due before the loan can be drawn down.

A common complication arises when the bank requires a signed franchise agreement, while the franchisor wants confirmed financing before signing. Both parties must accept the solution. A conditional agreement may not satisfy the bank; check that it is acceptable before signing, rather than waiting until you request a drawdown.

Agree in advance how long deadlines can be extended and at what point the project will be halted. Confirm changes in writing before the original payment deadline or before an obligation to order further work arises.

Practical takeaway: Before taking on commitments you cannot reverse, verify the drawdown conditions and agree in writing what will happen if the loan does not materialise. A promise of funding is no substitute for money available when you need it.