Franchise loans: how to check a personal guarantee

A franchise buyer may set up a Russian limited liability company (OOO) yet still be liable for its loan with their personal assets. The reason is a personal guarantee that the bank asks the founder or director to sign alongside the loan documents. When joining a franchise network, it is important to assess this risk separately: a well-known brand does not limit the lender’s claims. Here is what to check before signing a personal guarantee for a loan to buy and launch a franchise in Russia.

1. Separate the franchise purchase from the loan obligations

The franchise agreement, loan agreement and personal guarantee create separate legal obligations. Even if the bank is recommended by the brand, this does not mean the franchisor is liable for your company’s debt. Closing the outlet, falling out with the rights holder or failing to achieve the expected revenue does not, in itself, release you from repayments to the bank.

In Russia, commercial concession arrangements are governed by Chapter 54 of the Civil Code of the Russian Federation. Under Article 1028, the grant of the right to use a set of exclusive rights must be registered with Rospatent, Russia’s intellectual property authority. Without registration, the grant is deemed not to have taken effect. However, this does not automatically terminate the loan used to buy the franchise.

Personal guarantees are governed by Articles 361–367 of the Civil Code. Under a guarantee, the guarantor undertakes to the creditor to be liable, in whole or in part, for another person’s performance of an obligation. The limited liability enjoyed by an OOO shareholder therefore does not protect them from a personal guarantee they have given separately.

Before proceeding, request the full set of documents: the loan agreement, repayment schedule, guarantee agreement, the bank’s general terms and any security documents. A presentation outlining the loan scheme is no substitute for these documents. If the franchisor promises to reimburse interest payments, establish which separate document records that obligation: the promise alone changes nothing for the bank.

2. Establish how much you are liable for

Under Article 363 of the Civil Code, the borrower and guarantor are generally jointly and severally liable, unless the law or the agreement provides for subsidiary liability instead. With joint and several liability, the bank may make a claim against the guarantor without waiting for recovery proceedings against the company to conclude.

As a general rule, the guarantor is liable to the same extent as the borrower, including interest, legal costs incurred in recovering the debt and other losses suffered by the lender because of non-performance. The agreement may set a different scope of liability. The loan amount and your maximum personal exposure are therefore not necessarily the same.

Check four points:

• The debt covered. Does the guarantee identify a specific loan, or does it also cover the company’s future obligations to the bank?
• The liability cap. Is there an overall maximum amount, or is only the principal debt capped?
• Additional charges. Which interest, penalties, costs and losses are covered by the guarantee?
• Changes to the loan. Have you agreed in advance to remain liable if the loan amount or interest rate increases, or the financing term is extended?

If you are negotiating a liability cap, ask for it to be expressed as an aggregate limit covering all claims secured by the guarantee. Wording such as “a guarantee for the amount of the principal debt” calls for particularly careful reading of the surrounding clauses: these may list additional obligations separately.

Under Article 367 of the Civil Code, if the underlying obligation is changed without the guarantor’s consent in a way that increases their liability or has other adverse consequences for them, the guarantee generally remains in force on its original terms. However, advance consent to liability on amended terms may affect the outcome. Such consent must specify the limits within which the obligation may be changed.

3. Check the duration and grounds for demanding early repayment

The loan term and the duration of the guarantee may differ. Draw up a separate timeline covering the release of funds, the end of any grace period, the first payment, final repayment and termination of the guarantee. Do not assume that personal liability ends when the outlet closes or you sell your shareholding in the OOO.

If no duration is specified for the guarantee, Article 367 of the Civil Code provides special termination rules linked to the deadline for the lender to bring a court claim. The wording “until all obligations have been performed in full” does not, by itself, establish a term for the guarantee. It is best to ask a lawyer how these rules apply to your particular repayment schedule, rather than rely on an everyday understanding of when the agreement ends.

Review the grounds for demanding early repayment separately. These may include not only missed payments but also breaches of agreed financial covenants, reporting obligations or restrictions on how borrowed funds may be used. Check what consequences the agreement attaches to the end of your relationship with the franchisor.

Ask for a requirement to notify the guarantor of overdue payments and demands made to the borrower. Provide a current postal address and an email address you monitor. Discovering a problem late leaves less time to negotiate, even if the agreement allows an opportunity to remedy the breach.

4. Negotiate protective terms before the funds are released

The practical aim of negotiations is to make your personal exposure measurable. Propose a guarantee covering a specific loan rather than an undefined range of debts, an aggregate liability cap, a fixed duration and no advance consent to unlimited increases in the obligations covered. You can also discuss reducing the guarantee as part of the debt is repaid, although the bank is not obliged to accept these terms.

Do not sign a guarantee relying solely on a future sale of the business. A change of shareholder or director does not, in itself, end your personal obligation to the lender. The conditions for releasing you from the guarantee must be agreed separately with the bank.

Guarantors also have rights. Article 364 of the Civil Code allows a guarantor to raise defences against the lender’s claim that would have been available to the borrower. After the guarantor fulfils the obligation, Article 365 transfers the lender’s rights to them to the corresponding extent. However, a claim against your own insolvent company does not guarantee that you will recover your money.

Practical takeaway: before buying a franchise, write down three key features of the personal guarantee: the debt it covers, your maximum liability and its duration. If any of these cannot be clearly established from the documents, clarify the terms with the bank and a lawyer before deciding whether to proceed with the financing.