Franchise finance in Mexico: what to agree with the franchisor

Buying a franchise with deferred payments can make it easier to get started, but it also creates obligations that will stay with the business after opening. In franchising, a finance offer deserves the same scrutiny as the main agreement. This guide focuses on a specific situation: where the franchisor allows you to pay part of the investment in instalments or arranges a loan linked to the purchase.

1. Identify who is lending and what they are financing

The phrase ‘we offer finance’ can describe very different arrangements. The franchisor might defer part of the payment, a related company might provide a loan, or a financial institution might assess your application separately. A sales presentation is not the same as an approved loan.

Before committing, ask for a written proposal identifying:

• The person or company that will be your creditor.
• The amount financed and the items it covers.
• The contribution you must make from your own funds.
• Any outstanding conditions for approving and releasing the funds.
• Who will receive the funds: you, the franchisor or a supplier.
• Any additional documents you will need to sign.

Also distinguish between receiving funds and being given more time to pay. If the arrangement simply defers a payment owed to the franchisor, you will not necessarily have cash available for other expenses.

Ask whether you can buy the franchise without using that finance and whether doing so changes the price. This lets you compare alternatives on a like-for-like basis, without mistaking a payment arrangement for a discount.

2. Turn the offer into a complete repayment schedule

Do not base your decision solely on the advertised monthly payment. Request a schedule showing every payment date, the outstanding principal, interest and any additional charges. If the interest rate is variable, insist that the benchmark and the method for adjusting the rate are specified.

Pay particular attention to arrangement or administration fees, the costs of putting the agreement in place and the taxes applicable to each item. Ask for a clear distinction between amounts included in the proposal and those charged separately.

A grace period does not necessarily mean interest-free finance. Clarify whether interest accrues during that period, whether it is added to the balance and how much you will pay once the period ends.

When comparing proposals, use the same amount financed and an equivalent term. Calculate the total payments and charges, but also check when the money leaves your account: two offers with similar total outgoings can put different pressures on the business.

Also check:

• Early repayment: whether you can repay principal ahead of schedule, how much notice is required and what it costs.
• Allocation of payments: whether payments go towards charges, interest or principal first.
• Final payment: whether a large payment is due at the end of the term.
• Start of repayments: whether this is triggered by signing, release of the funds or opening the business.

Do not assume that a delay in opening automatically suspends monthly payments. Any such arrangement must be expressly agreed.

3. Ensure the arrangements comply with Mexican law

In Mexico, franchises are specifically regulated by the Federal Law on the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI). Article 246 requires a written agreement and sets out its minimum contents. These include the policies, procedures and timeframes relating to reimbursements, financing and other payments due from the parties, as agreed.

This does not oblige the franchisor to offer you credit or set a preferential interest rate. It does, however, make it particularly important that the agreed terms are not left as a verbal promise or a slide in a sales presentation.

If the finance terms are set out in a separate document, ask for it to be reviewed alongside the franchise agreement. The amounts, due dates, items financed and cross-references between documents must be consistent. Where another creditor is involved, its obligations must be set out in the appropriate document; the franchise agreement alone does not replace the loan agreement.

Depending on the transaction, Mexico’s Commercial Code, Federal Civil Code and the rules applicable to the creditor and the documents used may also be relevant. If you are asked to sign promissory notes, seek legal advice on their implications and on how their return or cancellation will be documented once the debt is paid off. Do not sign documents with blanks left to be filled in later.

4. Treat the franchise relationship and the debt separately

Before buying, ask what happens if the franchise agreement ends while you still owe money. The end of the commercial relationship should not be taken to mean that the financing is automatically cancelled.

Check whether the agreement allows the creditor to demand repayment of the entire outstanding balance early because of breaches of the franchise agreement, even if monthly payments are up to date. Ask for these triggers to be clearly defined and assess their impact with your adviser.

It is also worth clarifying who will collect payments if the creditor transfers the debt, how you will be notified and who will issue payment confirmations. If security or guarantees are required, identify the procedure for releasing them once the debt is paid off.

Practical conclusion: before agreeing to pay in instalments, gather the proposal, repayment schedule and all related agreements. Only proceed with the purchase once you can explain how much you owe, to whom, when payments begin and what will happen to the outstanding balance if the franchise stops operating.