Financing a franchise: loans, guarantees and signing the agreement

Joining a franchise network with borrowed funds requires more than affordable repayments. An often-overlooked risk is taking on obligations to the franchisor before you know whether the bank will release the money. This guide explains how to coordinate your credit application, guarantees and contract signing, without mistaking an offer of support for funding you can actually use.

1. Distinguish between a banking arrangement, loan approval and release of funds

A franchise brand may promote an arrangement with a bank as a benefit for new franchisees. However, that arrangement does not amount to loan approval: the bank will still assess your creditworthiness and may require you to contribute your own capital, provide additional documents or give guarantees.

Before choosing an offer, ask who actually provides the credit and what role the franchisor plays. A simple referral to a bank is different from deferred payment terms offered directly by the franchisor: the counterparty, terms and consequences of default will differ.

Identify three separate stages:

• Preliminary assessment: an initial indication, which does not guarantee that credit will be granted.
• Approval: the lending decision, which must be read alongside any deadlines and conditions still to be met.
• Release of funds: the point at which the money becomes available, potentially in instalments or against invoices.

Ask for written confirmation of the conditions for moving from one stage to the next. If the bank only releases funds after receiving invoices or evidence of expenditure, check which upfront payments you will have to cover yourself. Even an approved loan may not be available when the franchisor requests the initial payment.

2. Compare borrowing costs and obligations

To compare two offers, use the same loan amount, term and schedule for releasing funds. Do not focus solely on the advertised interest rate: request a repayment schedule and a full breakdown of charges, distinguishing compulsory costs from optional ones.

Look particularly at:

• interest charges and how the rate may change;
• application, payment collection and administration fees;
• any costs associated with required guarantees, accounts or insurance cover;
• early repayment terms;
• default interest and the consequences of late payment;
• reporting obligations and the circumstances in which the bank can demand early repayment.

An initial period before capital repayments begin is not necessarily free: interest is normally payable during this period, with repayment of the principal starting later. Ask your accountant to check how your repayments will change when that period ends.

For business borrowing, do not assume that consumer credit protections apply. Banking transparency rules remain relevant, but your rights and the documents required depend on the product and the borrower.

If you expect to receive public financial support, distinguish between submitting an application and actually being awarded support. Check eligibility requirements, eligible expenditure and timescales: an anticipated grant cannot be treated as money already available.

3. Understand how much of your personal wealth is at risk

Setting up a limited liability company does not remove personal exposure if a shareholder signs a personal guarantee. The bank may ask the business owner, shareholders or third parties to provide guarantees: each guarantor must independently understand the commitment they are making.

Before agreeing, have at least four aspects reviewed:

• Amount covered: which debt are you guaranteeing, and what interest or charges are included?
• Scope: does the guarantee cover this loan alone, or other obligations to the bank as well?
• Duration and release: when does the guarantee end, and what written confirmation establishes that you have been released?
• Enforcement: in what circumstances, and through what process, can the guarantor be required to pay?

Do not assume that leaving the company or closing the franchise business automatically releases you from the guarantee. Confirm any release with the lender.

A government-backed guarantee is not a non-repayable grant and does not remove the obligation to repay the loan. Ask the bank to explain in writing how it interacts with any personal guarantees.

4. Coordinate signing with the funding decision

In Italy, franchising is governed by Law No. 129 of 6 May 2004. The agreement must be in writing to be valid. At least thirty days before signing, the franchisor must provide a complete copy of the agreement, together with the annexes required by Article 4, subject to the exceptions set out in the law. This interval does not constitute bank approval or guarantee a general right to withdraw after signing.

If borrowing is essential, ask your lawyer to negotiate a condition precedent making the agreement conditional on obtaining finance. This protection is not automatic: it must be agreed and drafted precisely.

The clause should specify the amount required, the deadline, acceptable financing terms, evidence of the outcome and what happens to any money already paid. It should also clarify which obligations, if any, remain binding in the meantime and be coordinated with commitments to suppliers or other parties: protecting the franchise agreement alone may not be enough.

Practical tip: before signing or making non-refundable payments, bring your bank, accountant and lawyer together to agree a single timetable. Every payment should have a confirmed source of funding and a written provision setting out what happens if the credit does not come through.