Buying a Franchise in India: Conditions to Set Before Loan Approval

Once you have chosen a franchise, the next step is often to apply for a bank loan. But the brand’s approval, an encouraging initial response from the bank and the loan funds reaching your account are three different things. For a first-time franchise buyer, a key precaution is to avoid taking on payment obligations that would be difficult to meet from savings before finance becomes available. That is why you need to review the loan process and the franchise agreement together.

1. Understand the difference between an assurance of finance and approval

The franchisor may say that you could obtain a loan through a bank it knows. That introduction may be useful, but it does not guarantee that your application will be approved. The bank will decide based on your financial position, the proposed business and its own lending criteria. Do not treat the brand’s recommendation as a commitment from the bank.

Keep three stages of financing separate: preliminary discussions, a conditional loan approval letter and the actual release of funds. Even receiving an approval letter does not mean the money is immediately available. It may require you to contribute your own capital, provide documents, put up security or meet other conditions.

Ask the bank to confirm in writing:

• Which costs can the approved loan cover?
• Are the franchise fee, fit-out and initial stock all eligible expenses?
• When must you contribute your own capital, and what evidence will be required?
• Will funds be paid into your account or directly to suppliers?
• How long will the approval remain valid, and what conditions must still be met before funds are released?

Without these answers, it is risky to assume that the loan will finance the entire project.

2. Make funding availability a condition of the agreement

India has no separate, comprehensive central franchise law, mandatory pre-sale disclosure regime or central franchise registration system. This does not mean that franchising is unregulated. The Indian Contract Act, 1872 provides the main legal framework for contract formation, free consent, performance and breach. Banking rules applicable to the loan, along with tax, property, intellectual property and other general laws relevant to the business, also apply.

Failing to obtain a loan does not automatically remove your payment obligations under a franchise agreement. Before signing, ask a lawyer to draft a clause specifying which obligations will begin only once funding is available. This is a protection you must negotiate, not an automatic right afforded to franchise buyers.

Simply stating “subject to loan approval” does not provide enough clarity. Specify the minimum funding required, the deadline for approval, acceptable loan terms and whether the funds must actually have been released. Also agree what will happen if the application is rejected or a smaller amount is approved.

Will the deadline be extended, the project scaled down or an option to terminate the agreement provided? Which advance payments will be refunded, and which documented expenses may be deducted? Put these outcomes in writing. Your responsibility to submit the application and supporting documents on time should also be clear.

3. Align the bank’s timetable with the brand’s

Create a simple table showing each payment item, its due date, the source of funding and any conditions that must be met first. List the franchise fee, premises fit-out, equipment, initial stock and cash retained for operations separately. Add any costs the bank will not finance to the amount you need to fund yourself.

Pay particular attention to situations where each party expects the other to act first. For example, the bank may require a signed franchise agreement, while the franchisor may demand the full fee as soon as you sign. Do not proceed without agreeing an acceptable sequence with both the bank and the brand. Negotiating a conditional agreement or staged payments may help, but both parties must accept the arrangement.

Also check when loan repayments begin. If repayments fall due before trading starts, you will need separate funds to cover that period. Do not assume that any initial repayment relief is an interest-free period; check the approval letter to understand how interest will be calculated and paid.

4. Test three scenarios before signing

Do not assess your budget only on the assumption that the full loan amount will arrive on time. Set out three possibilities: the loan is smaller than expected, funds are released late or the application is rejected. In each case, check which payments will still be due and how much cash will remain.

Before taking out expensive short-term borrowing to cover a shortfall, assess its repayments alongside those of the original loan. Keep savings available for the business separate from the essential financial safety net for your family. If making the plan work would exhaust both, renegotiate the investment or payment schedule.

Practical takeaway: Review the bank’s approval letter, the conditions for releasing funds and the franchise agreement together. Commit to irreversible expenditure only once you have written answers to two questions: when will the funding be available, and what obligations will remain if it is not?