Buying a Franchise: Agree What Happens If Your Loan Is Refused

Applying for a loan does not mean the funds to buy a franchise are available. If the contract is already binding when the bank rejects the application, the prospective franchisee may still be required to pay or be considered in breach of the agreement. Clearly allocating financing risk helps both parties start their franchise relationship on a sound footing. Before signing, agree what will happen if the loan is refused, approved only in part, or released late.

1. Distinguish between applying for a loan, approval and release of funds

A claim that a franchise brand has a relationship with a bank does not guarantee that your application will be accepted. The bank may still assess you, your business documents and your collateral, and apply its own lending criteria. Help from the franchisor with preparing documents is not the same as an obligation to provide alternative funding.

Before agreeing a payment schedule, map out these three stages:

• Application: the documents have been submitted, but no lending decision has been made.
• Approval: the bank has agreed to provide finance, possibly subject to conditions that have not yet been met.
• Release of funds: the money is actually available to meet payment obligations in line with its permitted use.

Ask the bank to explain in writing which documents it needs, the conditions for releasing funds and how long its approval remains valid. Do not rely solely on explanations from the brand’s sales team or a loan broker.

Also check whether the bank needs a signed franchise agreement before it will assess the application. If so, discuss with the bank and franchisor whether a contract containing a financing condition would be acceptable. Do not assume that a draft contract will always be enough, or that signing must immediately trigger every payment obligation.

2. Make adequate financing an explicit condition

Indonesia regulates franchising specifically through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. The relationship between franchisor and franchisee is based on a written agreement. Alongside these specific rules, the contractual principles in the Indonesian Civil Code remain relevant: Article 1320 sets out the requirements for a valid agreement, while Article 1338 confirms the binding force of agreements lawfully entered into.

However, do not assume that a refused loan automatically cancels the franchise contract. The protection you need must be expressly drafted and agreed, rather than assumed to exist as a general right to cancel.

Ask a legal adviser to help determine which obligations should take effect only once the financing requirements have been met. The key points to specify include:

• the minimum amount of financing required;
• deadlines for obtaining approval and receiving the funds;
• what evidence is sufficient to establish the loan’s status;
• which payment obligations are deferred while the process is under way;
• what happens if the financing requirements are not met.

Define what “approved” means, too. Approval for an amount well below your needs, or subject to collateral requirements you cannot meet, may not resolve your funding needs. The criteria should be objective and written down, rather than simply referring to “a loan satisfactory to the buyer”.

3. Address three possible outcomes before payment falls due

Financing does not always end with a simple yes or no. Discuss at least three possible outcomes with the franchisor.

The loan is refused. Specify whether the agreement ends automatically or the prospective franchisee must give notice. Set out the notice deadline, the supporting documents required and whether any fees remain payable. If costs for preparatory work are non-refundable, ask for the type of work, evidence of expenditure and a cap on those costs to be agreed in advance.

The loan is approved only in part. Make sure you are not automatically obliged to cover the shortfall with another loan. Options could include adjusting the franchise package, contributing more of your own capital with your consent, or ending the transaction on the agreed terms. Changes to the package will also need the bank’s approval if they affect how the funds will be used.

The funds are released late. Agree a written procedure for extending deadlines. Avoid a situation where payment is due but the funds are held up because the conditions for release have not been met. Specify who must provide any additional documents and at what point further delay is no longer acceptable.

These clauses should also require the prospective franchisee to make a genuine effort to obtain the loan and provide accurate information. A fair allocation of risk protects both parties; it should not create an unrestricted excuse to cancel.

4. Align the contract with commitments to prepare the outlet

Financing provisions in the franchise contract do not automatically bind the landlord, equipment suppliers or contractors. You may still owe them money even if the franchise purchase does not go ahead.

List the commitments you will make before the funds are released. For each one, record who must be paid, the payment deadline, whether payment can be deferred and the consequences of cancellation. Wherever possible, do not place non-cancellable orders for work before funding is secure.

Keep the bank’s decision letter, correspondence requesting documents and approvals for changes to the timetable. If the contract specifies a particular method of giving notice, follow it; informal conversations may not meet the agreed notice requirements.

Practical step: before signing, make sure you can answer one question: if the loan funds are not released, what will you still have to pay? If the answer is unclear, resolve the financing clause first.