Your first franchise: what if the prospective franchisee cannot get a loan?

When expanding an established business into a franchise network, a risky gap can arise between signing the agreement and opening: the prospective franchisee is relying on a bank loan, while the franchisor is already ordering equipment and booking training. If the bank refuses funding, expectations alone do not determine who bears the costs. Before signing your first agreement, establish a clear process linking evidence of funding, the point at which obligations arise and permission to start spending.

1. Distinguish the bank’s interest from available funds

A prospective franchisee’s statement that ‘the bank supports the project’ is not proof that they will be able to meet their agreed obligations. Even an approved loan may be subject to additional security, a contribution from their own funds or the submission of signed agreements. When planning the opening, what matters is when the money will actually be available and on what terms.

As the franchisor, draw up an overview of the funding milestones. You are not making decisions on the bank’s behalf or guaranteeing the prospective franchisee’s creditworthiness; you are checking whether the timetable is realistic.

Ask the prospective franchisee to clarify:

• which funds are their own and which are borrowed;
• what stage the bank’s assessment has reached;
• which conditions still prevent the loan from being drawn down;
• when they expect a decision and access to the funds;
• which payments fall due before the anticipated drawdown date.

Collect only the evidence needed for this purpose and restrict access to it. The prospective franchisee can redact sensitive information that is not relevant to checking the funding position. Record your findings in writing, together with the date of the check, as funding terms may change.

2. Choose your contractual approach before signing

Slovenia has no specific franchising act, compulsory franchise register or statutory franchise-specific disclosure document. Franchise agreements are not specifically regulated as a distinct type of contract under Slovenia’s Obligations Code (OZ). They are subject to the general rules of contract law, including the principle of good faith and fair dealing, and the rules governing negotiations, contractual conditions and the performance of obligations.

As a general rule, a loan refusal does not, in itself, release a party from contractual obligations already undertaken. Simply stating that the prospective franchisee is ‘arranging funding’ is therefore not enough. Work with a lawyer to choose an approach that reflects the actual sequence of events.

The first option is to sign only once funding has been confirmed with sufficient certainty. This is straightforward, but the bank may need a signed agreement or other evidence of the project before making its decision.

The second option is an agreement with a suitably drafted suspensive condition, making its effect conditional on securing the agreed funding. Specify exactly which obligations are deferred and which apply immediately, such as protecting confidential information. Avoid vague wording such as ‘the agreement takes effect once the loan is approved’ without defining the evidence required and the deadline.

Another option is to agree a specifically defined right to terminate if funding is not secured. This is not the same as a suspensive condition: the agreement may already be in effect, and the consequences of termination must be addressed separately. A franchise association’s code of conduct does not replace these provisions and is not a government guarantee of funding.

3. Define what securing funding means

The contractual provisions must make it possible to establish clearly whether the agreed condition has been met. Define the amount of funding required by reference to the approved investment plan, the final deadline and acceptable evidence. Distinguish loan approval from satisfaction of the conditions for drawing it down.

Also set out the prospective franchisee’s obligations to cooperate: submitting a complete application on time, responding to the bank’s requests and reporting significant changes. The franchisor should commit to providing specified information about the business model to support the application. Business projections should state their assumptions clearly; do not present them as a guarantee of future revenue.

Answer three further questions in advance:

• What happens if the bank approves less funding than is needed?
• Can the prospective franchisee cover the shortfall with verifiable funds of their own?
• How will an extension be approved if the bank has not yet made a decision?

Any extension should be agreed in writing and linked to a revised timetable. This avoids a situation in which the prospective franchisee expects the project to continue while the franchisor believes the agreement has already ended.

4. Limit non-recoverable costs until funding is confirmed

A condition in the franchise agreement does not automatically bind the landlord, equipment supplier or refurbishment contractor. The prospective franchisee may therefore still owe money to a third party even if the franchise project does not proceed. Deadlines and conditions must also be aligned across related agreements.

Draw up a list of activities that require specific written consent before funding is confirmed. These might include ordering bespoke equipment, starting refurbishment work or making a non-refundable booking with an external contractor. For each exception, specify who is placing the order, the maximum authorised cost and the consequences of cancellation.

Address amounts already paid separately: what will be refunded, what covers services actually delivered, how costs will be evidenced and when refunds are due. Do not automatically describe a payment as ‘ara’ (earnest money), as this has specific legal consequences under the OZ. Have the wording reviewed by a lawyer, not just an accountant.

Practical takeaway: before launching your first franchise, prepare a single overview of funding, contractual deadlines and authorised expenditure. Until it is clear who pays if the loan is refused, do not commit to non-recoverable expenditure.