Personal guarantees when financing a franchise in Spain

Entering the franchise sector may require finance, but securing a loan is not the only goal: the assets you put at risk to obtain it matter too. A personal guarantee can transfer business risk to your savings and other assets. Before agreeing, distinguish between the company’s debt and the obligations you will take on personally as guarantor.

1. Identify who owes the money and who is liable

Draw up an overview of the guarantees you are being asked to provide. The bank may require a personal guarantee before lending to your company; the franchisor may ask for a guarantee covering contractual payments; and the landlord may want another for the rent. Although these may appear in separate documents, they can all increase the same person’s financial exposure.

For each obligation, note:

• Who the principal debtor is and who signs as guarantor.
• Who can demand payment.
• Which debt is covered and for what amount.
• Which assets or funds are at risk.
• When the guarantee ends and how its cancellation is documented.

Setting up a limited company does not shield you from a personal guarantee. If you sign as guarantor for your company’s debt, you take on an obligation of your own towards the creditor. Also check the capacity in which you sign each document: director, borrower and guarantor do not mean the same thing.

Do not confuse a personal guarantee with a bank guarantee. With a bank guarantee, the bank guarantees payment to the beneficiary, but will normally require you to reimburse anything it pays out and may ask for counter-guarantees or funds to be blocked as security.

2. Understand the clauses that increase your risk

Guarantees of this kind are governed by Articles 1822 onwards of the Spanish Civil Code. Their scope depends on the wording you sign and the applicable legal rules. Article 1911 establishes the general rule that debtors are liable with all their present and future assets, so a personal obligation should not be treated as a mere formality.

Pay particular attention to these terms:

• Joint and several guarantor (fiador solidario): this may allow the creditor to demand payment directly from you without first exhausting the principal debtor’s assets.
• Waiver of the benefit of excussion (beneficio de excusión): where this protection would otherwise apply, waiving it removes your right to require the creditor to pursue the debtor’s assets first.
• Waiver of the benefit of division (beneficio de división): if there are several guarantors, this may prevent you from insisting that the claim be divided between them.
• All present and future obligations: this may extend the cover beyond the loan or payment you thought you were guaranteeing.

“On-demand” guarantees also need specialist review: depending on how they are structured, they may limit the objections a guarantor can raise before paying.

Do not assume you will be able to rely on consumer protections. For guarantees linked to business activity, consumer status requires an assessment of the purpose of the transaction and the guarantor’s relationship with the business.

3. Negotiate specific limits, not verbal promises

The aim need not be to remove every guarantee, but to avoid open-ended, indefinite liability. Ask for the negotiated terms to be included in the document the creditor will sign.

Propose an overall maximum amount, making clear whether it includes principal, interest, fees, penalties and costs. A cap that applies only to the principal may leave significant amounts outside it.

Define the debt covered as well: identify the guaranteed loan or contract and avoid having new transactions included automatically. Ask for any extensions that increase your exposure to require your express consent.

On timing, distinguish between the debt’s maturity date, the duration of the guarantee and the period during which claims can be made for covered obligations. A single date may not settle all three issues.

Other useful proposals include reducing the cover as the loan is repaid or agreeing that the guarantee will be released once objective conditions are met. Selling your shares or stepping down as a director does not, by itself, release you: the creditor must agree to your release on the relevant terms.

4. Coordinate the financing with signing the franchise agreement

Spain does have franchise-specific legislation: Article 62 of Law 7/1996 on the Regulation of Retail Trade and the provisions of Royal Decree 201/2010 that remain in force. These require written pre-contractual information to be provided at least twenty working days before any franchise agreement or preliminary agreement is signed, or before the prospective franchisee makes any payment to the franchisor.

This period is no substitute for reviewing the loan and does not automatically give you a right to cancel the financing. Nor does an introduction to a bank arranged by the franchisor amount to credit approval.

Before making commitments, request the financing terms in writing and negotiate what will happen to reservation fees or other sums paid if the financing falls through. If jointly owned assets or guarantees from your spouse are involved, also arrange a review of the applicable matrimonial property regime.

Practical conclusion: do not sign until you can explain how much you might have to pay, which debts you would be liable for and when you would be released. Have all the contracts and guarantees reviewed together by an independent legal adviser: your true exposure lies in their combined effect.