Before Joining a Franchise in Japan: Financing Clauses and the Order of Funding and Contracts

When joining a franchise, you need to distinguish between your prospects of securing finance and your contractual payment obligations. Even if a franchisor says it will help you obtain a loan, this does not guarantee approval or the release of funds by a lender. Before committing to a franchise, check both the contractual arrangements and the timetable for dealing with finance that does not come through as planned.

1. Distinguish between financing support and a financing guarantee

A franchisor’s financing support may take various forms, including help with preparing a business plan, introductions to lenders and attendance at meetings. However, even a lender introduced by the franchisor will assess your application before deciding whether to lend. Passing the franchisor’s selection process is separate from passing a lender’s credit assessment.

If you are considering a loan from the Japan Finance Corporation or a private-sector financial institution, do not leave everything to the franchisor. Contact the lender yourself to confirm the documents required and the steps involved. Conditions vary between lending schemes, and an initial consultation does not establish the final loan amount or the date funds will be released.

Ask the franchisor the following questions:

• Does its support consist only of introductions, or does it also cover preparing and revising documents?
• Is there a fee for this support? Is it payable even if no loan is secured?
• Can you scale down the opening plan if the loan falls short of the amount requested?
• Can the opening deadline be extended if the assessment or release of funds is delayed?

Keep a record of the answers in proposal documents or emails, and check them against the contract for discrepancies. A statement that previous applicants have borrowed without difficulty is not evidence that you will secure finance.

2. Put all payments due before loan disbursement in chronological order

As well as deciding how much to borrow, establish what you will need to pay before the loan reaches your account. Franchise fees, application fees, security deposits, initial premises costs and advance payments for building work may all have different recipients and refund conditions.

Your funding schedule should include, at a minimum, columns for the payee, payment deadline, amount, refund conditions and source of funds. Even if the total cost is within your combined available capital and expected borrowing, you will face a cash shortfall if payments fall due before the funds arrive.

Include working capital after opening in your funding calculations, not just pre-opening costs. Estimate wages, rent and other outgoings until receipts become stable, and manage these funds separately from your household living expenses. If you use your own money to cover a financing shortfall, that does not mean you can safely exhaust your working capital.

Loan approval and loan disbursement are separate stages. Even after approval, you may need to meet further conditions, such as submitting documents, before funds are released. Ask the lender whether your planned payments qualify for financing and whether paying them first from your own funds would affect their eligibility.

When the franchisor specifies a payment deadline, verify why you can reasonably expect to have the money available by that date. Avoid committing to payments while the progress of your loan assessment remains uncertain.

3. Make the financing clause cover reduced amounts and delays, not just rejection

Here, a financing clause means an agreement setting out what happens to the contract, any right to terminate it and money already paid if the planned financing cannot be obtained. This is not a statutory protection automatically included in Japanese franchise agreements. If you need it, negotiate it with the franchisor and put it in writing.

Simply stating that the parties will discuss matters if financing is not approved does not clarify whether the franchisee will be released from payment obligations. Specify the following:

• Required financing conditions: The loan covered, the minimum amount needed and the deadline for disbursement.
• Events covered: Whether the clause covers approval for a reduced amount and delayed disbursement, as well as outright rejection.
• Procedure: Whom to notify, by when, by what method and with which supporting documents.
• Treatment of the contract: Whether it will not take effect, may be terminated or will be postponed.
• Financial settlement: Which payments are refundable, what costs may be deducted, the refund deadline and whether any termination penalty applies.

Also address cases where financing cannot be secured because of something on the prospective franchisee’s side, such as failing to apply or submit required documents. If the franchisor will deduct actual costs from a refund, agreeing the activities covered, supporting evidence and a cap can reduce disputes when settling the account.

Do not assume that approval for less than the requested amount must be made up through additional borrowing or your own funds. Check whether, if the amount falls below what you need, you can retain the option not to proceed rather than merely having a right to further discussions. Ask a lawyer to review the wording, including its consistency with other termination and refund provisions.

4. Do not confuse Japan’s disclosure rules with contractual protection

Japan does not have a single comprehensive law specifically governing all franchise agreements. However, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors falling within its definition of a “specified chain business” to provide prospective franchisees with a written outline of the business, key contract terms and other prescribed information, and explain it before the contract is signed. This does not automatically apply to every retail or food-service agreement; applicability depends on the statutory criteria.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act also identify matters that should preferably be disclosed before a contract is signed, and are not limited to retail and food service. These include the nature and amount of payments collected on joining, and whether and under what conditions they are refundable.

Franchisees are businesses independent of the franchisor, and their dealings are subject to the Antimonopoly Act. General principles of the Civil Code also apply to matters such as contract formation, non-performance and termination. However, the existence of disclosure rules does not give you an unconditional right to a refund if your loan application is rejected.

If the disclosure document states that the franchise fee is non-refundable but a separately negotiated financing clause provides for a refund, make clear in the contract which provision takes precedence. Do not rely solely on a salesperson’s explanation: record a formal agreement with an authorised representative of the franchisor.

5. Align the conditions in contracts beyond the franchise agreement

Including a financing clause in the franchise agreement does not automatically cancel a lease, building works contract or equipment order. Even if you can withdraw from the franchise, payments under other contracts may remain due.

Negotiate the conditions with the counterparty to each contract. Check whether you can wait until financing is more certain before placing a firm order, remain at the application stage or secure a right to terminate if financing cannot be obtained. Even where the franchisor introduces the premises or building contractor, confirm in writing who the contracting parties are and who bears the costs.

In practice, begin by consulting lenders and preparing your documents, then obtain the necessary draft contracts and quotations. Ask the lender whether any contracts must be signed for the loan assessment, and coordinate signing and payment dates with the franchisor and property owner. It may not be possible to leave every contract unsigned until financing has been secured, so make each risk you take on beforehand explicit.

Practical takeaway: Before signing, bring together the payment dates and refund conditions for every contract in a single table. Decide whether to join only once you can explain how much you would remain liable for in each of three scenarios: rejection, a reduced loan amount and delayed funding.