Financing a Franchise in Venezuela: Personal Guarantees

Buying a franchise with finance means looking beyond the monthly instalment. A personal guarantee can put the buyer’s assets at risk even if the business operates through a company. In franchising, distinguishing between who receives the money, who must repay it and who guarantees the debt helps you negotiate with greater clarity. This guide explains how to review those guarantees before taking on obligations in Venezuela.

1. Identify who is liable for each debt

Finance may come from a bank, the franchisor or an equipment supplier. Each arrangement may involve different documents and guarantees. Do not assume that all liabilities are limited to the capital invested in the company.

Prepare a list recording five details for each obligation: creditor, debtor, amount or calculation method, due date and required guarantee. Include deferred payments of the initial franchise fee and financed equipment, even if no one describes them as a loan.

Then distinguish between the roles:

• Principal debtor: takes on the direct obligation to pay.
• Guarantor (fiador): guarantees another party’s obligation, within the scope set out in the document and the applicable law.
• Joint and several debtor (codeudor solidario): may be liable to the creditor for the entire debt, not merely a share agreed internally.
• Party providing security over a specific asset: pledges an asset as security, which requires a review of the relevant formalities for creating that security.

The document’s title is not enough. A signature that appears to be merely administrative could create a personal obligation if the document’s wording provides for one. Ask your lawyer to identify the capacity in which each person is signing and the consequences.

2. Understand Venezuela’s legal framework

Venezuela does not have a comprehensive law specifically governing franchises. This does not mean that the relationship is unregulated: the Civil Code contains rules on obligations, contracts and guarantees; the Commercial Code governs commercial obligations and includes provisions relevant to commercial guarantees. Banking rules and the formalities for security over assets may also apply, depending on the transaction.

A general explanation of guarantees under civil law should therefore not be applied automatically to a commercial guarantee. Whether payment can be demanded from the guarantor, and which defences are available, depends on the nature of the obligation, the wording of the signed document and the applicable rules.

Nor should you confuse setting up a company with fully protecting your personal assets. If a shareholder personally guarantees a company debt, they take on additional exposure that must be assessed separately.

Seek legal review of the financing agreement as well as its annexes, promissory notes and guarantee documents. A favourable clause in the franchise agreement does not, by itself, change what has been agreed with a different creditor.

3. Negotiate the amount, duration and release terms

A guarantee should make clear what it covers and when it ceases to have effect. If its scope is difficult to explain, it is not yet clear enough for you to make an informed decision.

Review these points:

• Debt covered: identify the specific contract and transaction. Challenge open-ended references to all present and future obligations.
• Financial limit: seek a cap on liability and clarify whether it includes interest, debt collection costs and other ancillary charges.
• Currency: check the currency in which the debt is stated, how it must be paid and which conversion mechanism applies, where relevant. Have its validity and application reviewed.
• Changes: establish what happens if the credit facility is increased, the term changes or the debt is refinanced. Negotiate a requirement for your express consent to any increase in your exposure.
• Release: specify which payments or conditions allow the guarantee to be discharged and who must document this.

Do not assume that a date printed in the document removes all outstanding liability. Distinguish between the period during which guaranteed obligations can arise and the right to pursue debts that have already arisen.

If there are several shareholders, an internal agreement to share payments can be useful, but it does not necessarily limit what the creditor can claim. Any such limit must be accepted by the party entitled to payment.

4. Assess the risk before putting assets on the line

Draw up a combined schedule of instalments, due dates and guaranteed obligations. The aim is not to repeat the brand’s business forecasts, but to check whether the financing structure requires cash before the business can generate it.

Test specific scenarios: a delayed opening, a temporary interruption to operations or late customer payments. Calculate how much you would need to contribute personally to keep up payments and which family commitments would compete for that money.

Compare alternatives: borrowing a smaller amount, contributing more capital without exhausting your reserves, or negotiating security limited to specific assets. A lower instalment does not always mean lower risk if it requires you to put more assets on the line.

Practical conclusion: do not sign until you have a summary for each guarantee setting out the debt covered, maximum liability, assets at risk and release mechanism. Review it with a Venezuelan lawyer and an accountant, both independent of the creditor.