Buying a Franchise in Malaysia: Check Your Financing Approval Conditions

Receiving a financing approval letter does not mean that all the costs of buying a franchise are covered. Funds may only be released once certain conditions have been met, while the franchisor or suppliers may require payment earlier. For prospective franchise buyers in Malaysia, the key is to align financing conditions with purchase commitments so that you do not become liable for payments you cannot yet make.

1. Distinguish approval from funds available to use

Do not base your decision solely on the statement that “financing has been approved”. Read the full offer letter and ask your financing officer to explain what must be completed before the first release of funds. Conditions vary by institution, product and applicant profile; do not assume that another buyer’s experience will apply to you.

Prepare a written summary covering:

• Approved amount: is it sufficient to cover the expenses that are actually eligible for financing?
• Your own contribution: how much money must you put in first, and what evidence is required?
• Conditions for releasing funds: which documents, approvals or actions are still outstanding?
• Payment recipient: will the funds go into your business account or be paid directly to suppliers?
• Offer validity period: what are the deadlines for accepting the offer and meeting its conditions?
• Start of repayments: what triggers instalments or related charges?

Ask whether funds may be released in stages. Financing paid out as work progresses may not cover an upfront deposit to a contractor. Similarly, a facility for purchasing equipment may not be available to pay franchise fees.

Distinguish between matters confirmed in writing and those that remain assumptions. If approval in principle is granted, do not treat it as a final offer without checking what it means with the institution concerned.

2. Match each payment to the conditions for releasing funds

Create a schedule linking your obligations to the franchisor with the financing institution’s processes. The aim is not to recalculate your entire working capital requirement, but to identify gaps between when payments fall due and when funds will actually be available.

Use the following columns: payment type, recipient, due date, source of funds, supporting documents and conditions for releasing funds. Include only commitments relevant to your package, such as initial fees, equipment, fit-out work and pre-opening costs.

For example, a supplier may require a deposit before releasing equipment, while the financing institution may need specific documents before making payment. If the two parties’ processes do not align, agree on a solution before accepting an order or entering into a binding contract.

Ask the financing institution specifically:

• Can payments made from your own funds be reimbursed?
• What types of invoices or proof of payment are accepted?
• Does changing a supplier or specification require fresh approval?
• Who confirms that all conditions for releasing funds have been met?

Do not automatically bridge this gap with short-term debt. First check the additional costs and whether new borrowing could affect the conditions of the facility you are applying for. Revising the payment schedule may be a more suitable solution, but all parties’ agreement should be recorded in writing.

3. Align purchase commitments with legal requirements

Malaysia has specific legislation governing franchising: the Franchise Act 1998, including its 2020 amendments. Registration guidance from the Ministry of Domestic Trade and Cost of Living (KPDN) also lists related regulations made in 2022. Buying a franchise therefore involves more than negotiating financing and an ordinary commercial contract.

Under Section 15, the franchisor must provide the prospective franchisee with disclosure documents and a copy of the franchise agreement at least 10 days before the agreement is signed. Use this review period to compare the payment obligations in the franchise documents with the actual financing conditions.

However, do not assume that this disclosure requirement automatically makes your purchase conditional on loan approval. If you need that protection, ask a solicitor to draft or review clauses clearly stating:

• What financing must be secured and by what date.
• What happens if the application is rejected or the approved amount is insufficient.
• How advance payments will be handled if the condition is not met.
• Whether a delay in the release of funds allows the payment schedule to be revised.

These are matters for negotiation, not automatic rights you can assume exist. Also distinguish between protections in the franchise agreement and the terms of supplier contracts; changing one document does not necessarily change another.

4. Carry out a final review before accepting the offer

According to guidance from Perbadanan Nasional Berhad (PERNAS), a business plan is required when applying for business financing from financial institutions. Make sure the plan you submit reflects the latest franchise package, rather than an outdated quotation or an opening schedule that has since changed.

Before accepting a financing offer, review it with your financing officer, accountant and solicitor as appropriate. Make sure you have identified the amount, permitted uses, financing costs, payment schedule and all outstanding conditions. Ask for written confirmation whenever a verbal explanation is unclear.

Practical rule: do not simply ask, “How much has been approved?” Ask, “When can the funds be released, which payments can they cover, and what conditions must be met first?” Proceed with the purchase when the financing schedule and contractual obligations genuinely align.