Financing a franchise: how to compare loans in Spain

Securing finance does not mean that any loan will be suitable for buying a franchise. Low initial repayments can conceal costs, defer capital repayments for too long or leave you with outstanding debt when the franchise agreement ends. Before joining a franchise network, compare bank offers using the same timeline and the actual conditions under which your business will operate.

1. Compare offers for the same funding requirement

Ask lenders for proposals covering the same amount, purpose and expected drawdown date. If one offer finances only the fit-out while another includes equipment and opening costs, their repayments cannot be compared directly.

Also distinguish between a loan and other financing tools. A loan provides capital that you repay according to a schedule; a credit facility lets you draw funds up to an agreed limit and subject to agreed conditions. Financing a long-term investment with credit that is subject to renewal could leave you having to repay it sooner than expected.

Request a written offer setting out:

• The amount approved and the net funds you will receive after upfront costs.
• Whether the interest rate is fixed or variable and, if variable, the reference rate, margin and review frequency.
• Arrangement, availability and early repayment fees, where applicable.
• Linked products or conditions for obtaining a discounted rate.
• The loan term, repayment frequency and full repayment schedule.

Compare the total cost, not just the advertised rate. If the offer includes a TAE, Spain’s annual percentage rate of charge, check its assumptions and which costs it covers. Add the cost of any required insurance, accounts or other services that are not included, taking care not to count the same item twice.

2. Check what happens after the repayment holiday

A repayment holiday can ease the preparation and opening period, but it does not mean free finance. Ask whether you will pay interest only during that time or whether interest payments will also be deferred. In the latter case, check whether interest is added to the principal and how this affects later repayments.

Request a schedule showing the jump between the final payment during the repayment holiday and the first payment that includes repayment of principal. Factor that change into your cash flow forecast, even if it falls at a point when you expect the outlet to be operating normally.

Run three practical checks:

1. Delayed opening: could you meet repayments if building work or approvals delay the start of trading?
2. Slower start: what happens if cash receipts take longer than expected to reach your forecast level?
3. Higher interest rates: if the loan has a variable rate, how would an unfavourable rate review affect repayments?

Do not confuse accounting profit with available cash. Repaying principal uses cash even though it is not an expense in the profit and loss account. Include it explicitly in your payment schedule, alongside interest.

3. Align the loan with the franchise agreement

Plot the signing date, drawdowns, opening date, start of repayments and expiry of the franchise agreement on a single timeline. If the loan runs beyond your right to operate the business, you will need to explain how you will repay the remaining debt without assuming that the agreement will be renewed.

In Spain, Article 62 of Law 7/1996 on Retail Trade and Royal Decree 201/2010 regulate aspects of franchising. Pre-contractual information must be provided in writing at least twenty working days before you sign a franchise agreement or preliminary agreement, or make any payment to the franchisor. The essential information to be disclosed includes the agreement’s duration and the conditions for renewal and termination.

Use that information to negotiate finance, not just to review your relationship with the franchisor. Bank approval is no substitute for analysing the agreement and does not guarantee the outlet’s viability.

If you need to commit before finance is firmly in place, agree in writing what will happen if the loan is refused or approved for an insufficient amount. Do not assume that a reservation payment will be refunded: establish the refund conditions and any amounts that could be retained.

4. Review your obligations while debt remains outstanding

The loan may impose additional obligations, such as submitting accounts regularly, maintaining certain financial ratios or seeking approval for particular transactions. Ask the lender to explain their implications and the circumstances in which it can demand early repayment of the debt.

Also review the early repayment conditions. If you later want to reduce your debt, refinance or sell the business, you will need to know the procedure and its cost. When borrowing for business purposes, do not assume that consumer credit protections apply automatically.

If the franchisor introduces you to a partner lender, still compare other offers. Ask whether any remuneration is paid for the introduction or arrangement, and distinguish an illustrative quote from bank approval that remains subject to conditions.

Practical conclusion: before accepting, bring together the written offer, repayment schedule and franchise agreement timeline. Choose finance whose cost you understand and whose repayments you can sustain even if the business gets off to a less favourable start than expected.