Starting a Franchise: Comparing Bank Finance

Starting a franchise may require finance, but choosing a bank based solely on the monthly repayment is risky. Two offers for the same amount can have very different costs, security requirements and conditions for releasing funds. Before committing to a brand, check not only how much you can borrow, but also when the money will be available and which obligations you will retain.

1. Submit the same application to each bank

To compare offers meaningfully, prepare a single application pack to submit to several banks. If the amount, term or intended use of the funds differs, comparing repayments becomes less useful.

The pack should set out the costs you want to finance separately: the initial franchise fee, work on the premises, equipment and other expenses supported by documentation. Include quotations, an expected payment schedule, details of your available funds and financial projections with clearly stated assumptions. Also indicate which commitments you have already signed and which are still negotiable.

Ask each bank:

• which expenses it will finance and what supporting documents it requires;
• whether it will also finance VAT or only amounts excluding VAT;
• how much of your own capital you must contribute;
• which conditions must be met before funds are released;
• whether the offer is indicative or based on a formal lending approval, and how long it remains valid.

An agreement between a bank and a franchisor does not mean your finance has been approved. Ask what specific benefits it offers and which assessments the bank will still carry out. A well-known brand is no substitute for an assessment of your ability to repay.

2. Compare the full cost, not just the interest rate

Request a written offer, the applicable disclosure documents and a repayment schedule. For a business loan, do not assume that all the protections available for consumer credit will apply.

In Italy, the banking regulatory framework is based on Legislative Decree No. 385/1993, the Consolidated Banking Act, alongside the Bank of Italy’s transparency rules. The information requirements and protections that apply also depend on the product and the customer category: ask the bank to explain how your business is classified.

Put at least the following details into a comparison table:

• the nominal loan amount and the funds actually available after deductions;
• whether the interest rate is fixed or variable, including any reference rate, margin and minimum rate;
• arrangement, repayment collection and administration fees;
• the cost of guarantees, valuations and any required linked products;
• the loan term, repayment frequency and any larger final payment;
• charges and other financial terms for early repayment.

For a variable-rate loan, also ask the bank to calculate the impact of a rise in the reference rate. When offers have different terms, compare both the regular repayment and the total amount repayable: a lower repayment may simply reflect a longer repayment period.

If there is an initial period before capital repayments begin, check which interest and fees accrue. Deferring capital repayments does not mean those months are free.

3. Read the guarantee requirements and additional obligations

The loan may require personal guarantees or security over assets. Before agreeing, establish who is taking on the obligation, for what amount and for how long. If a personal guarantee is required, the guarantor’s assets may be at risk even when the business operates through a company.

Have a professional check whether the guarantee covers only that loan or also other obligations to the bank. Check the conditions for release from the guarantee too: do not assume it ends automatically when you stop running the business.

Also read the obligations that apply during the loan term. These may concern the regular submission of accounts, specified financial ratios, additional borrowing or changes to the company’s structure or ownership. Ask what happens if you breach these obligations and whether you have time to remedy the breach.

If government-backed guarantees or financial support schemes are proposed, check eligibility, availability, costs and timescales against the scheme’s official documentation. A guarantee protecting the bank does not cancel the franchisee’s debt or make the release of funds automatic.

4. Coordinate the loan with the franchise agreement

The crucial step is to align your commercial commitments with the actual availability of funds. A bank may release funds only after receiving invoices or verifying conditions that themselves require you to have already incurred costs.

Draw up a written sequence covering lending approval, signing the loan agreement, meeting the conditions, release of funds and payments to the franchisor or suppliers. For each stage, identify the document required and the party responsible.

Italy’s Law No. 129 of 6 May 2004 on franchising requires the franchise agreement to be in writing, otherwise it is void. It also requires the agreement to expressly state the investment and any initial franchise fees payable before opening. These details help you prepare the bank application, but the law does not guarantee access to credit.

If the project depends on a loan, discuss with your lawyer whether to make the agreement conditional on obtaining finance. You will need to define the amount required, the deadline and the consequences if finance is not secured, while also coordinating any related agreements. Do not assume that a bank’s refusal automatically releases you from commitments you have already signed.

In practice: choose your finance only after comparing the total cost, guarantees and security required, and conditions for releasing funds. Have the bank’s offer and the franchise agreement reviewed together before taking on binding obligations.