Franchise Financing in the Philippines: Banks, Leases, and Security Arrangements

A franchise business in the Philippines is typically financed through a mix of equity, bank borrowing, equipment leasing, and supplier credit. Philippine law does not create a single "franchise loan" — the financing is built from ordinary contracts: a loan, a lease, a security arrangement, and the franchise agreement itself. Because these are contracts, the Civil Code governs their formation, and the Revised Corporation Code governs the corporate borrower. The practical work is matching the lender's security requirements to assets the franchisee actually owns.

How franchise financing is usually structured

Most franchisees fund the package in layers. The franchise fee and initial working capital often come from personal or corporate equity. Fit-out, equipment, and vehicles are commonly financed through bank loans or leases. Inventory and supplies may be covered by trade credit from the franchisor or suppliers.

Each layer is a separate contract with its own parties, terms, and remedies. A bank loan is a contract of loan. An equipment lease is a lease. A security arrangement is an accessory contract. The franchise agreement is a separate contract between franchisor and franchisee. The Civil Code states that in matters governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of the Civil Code (Article 18).

What banks look for from a franchise borrower

Banks assess the borrower's capacity to pay, the collateral offered, and the enforceability of the franchise arrangement. For corporate franchisees, the basic documents are the articles of incorporation and the certificate of incorporation.

A private corporation organized under the Revised Corporation Code commences its corporate existence and juridical personality from the date the Commission issues the certificate of incorporation under its official seal (Section 18). A juridical person may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of its organization (Article 46, Civil Code).

Where the franchisee operates through a corporation, the board of directors exercises the corporate powers, conducts all business, and controls all properties of the corporation (Section 22, Revised Corporation Code). The board must also elect a president, a treasurer who must be a resident, and a secretary who must be a citizen and resident of the Philippines (Section 24). Lenders commonly require board resolutions authorizing the loan and the security.

Equipment leasing and supplier credit

Instead of borrowing to buy equipment, a franchisee may lease it. Leasing keeps the asset off the borrower's balance sheet and shifts residual risk to the lessor. The Civil Code recognizes leases as a species of contract and supplies the governing rules where no special law applies (Article 18).

Supplier credit works differently: the franchisor or a supplier extends payment terms on inventory. This is a contract of loan or a sale on credit, depending on how the parties structure it. Either way, the terms are contractual, and the Civil Code's rules on obligations and contracts apply.

Security arrangements and corporate limits

Lenders typically require security. Common forms include a mortgage over real property, a pledge or chattel mortgage over equipment, and personal guarantees from the franchisee's principals.

For corporate borrowers, certain acts require shareholder approval. Under Section 6 of the Revised Corporation Code, holders of nonvoting shares are entitled to vote on the sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property, and on incurring, creating, or increasing bonded indebtedness. The same section provides that, except as stated, the vote required to approve a particular corporate act refers only to stocks with voting rights.

A corporation may also issue preferred shares with preference in dividends and in the distribution of corporate assets in case of liquidation (Section 6). Redeemable shares may be issued when expressly provided in the articles of incorporation (Section 8). These instruments can be relevant where a franchise venture brings in investors rather than pure lenders.

Franchisor consent and transfer restrictions

Many franchise agreements restrict transfer of the franchise or of shares in the franchisee corporation. Where the franchisee is a corporation, transfers of stock may be limited by the articles of incorporation. The Revised Corporation Code allows a corporation to further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements (Section 6). Franchise agreements commonly add their own consent requirements for any change in ownership or control.

Frequently asked questions

Can a franchise be used as collateral for a bank loan in the Philippines? The franchise right itself is a contractual interest, and lenders are often reluctant to take it as sole collateral because it depends on the franchisor's consent and continued performance. Banks more commonly take security over tangible assets, real property, or shares, plus personal guarantees.

Does a corporation need board approval to borrow money for a franchise? Yes. The board of directors exercises the corporate powers and conducts all business of the corporation (Section 22, Revised Corporation Code). Lenders normally require a board resolution and, where the act involves substantially all corporate property or bonded indebtedness, the vote of stockholders as provided in Section 6.

Can a franchisee lease equipment instead of buying it? Yes. Leasing is a contractual arrangement, and in matters governed by the Code of Commerce and special laws, any deficiency is supplied by the Civil Code (Article 18). The lease terms, residual value, and end-of-term options are set by the contract.

Practical takeaways

• Philippine law has no separate franchise financing statute; funding is built from loans, leases, security contracts, and the franchise agreement, all governed by the Civil Code.
• Corporate franchisees must observe Revised Corporation Code requirements on board authority, officer qualifications, and stockholder votes for major acts.
• Lenders usually prefer tangible collateral and personal guarantees over the franchise right itself.
• Check the franchise agreement for consent and transfer restrictions before pledging shares or changing ownership.
• Match the financing structure to the asset: lease equipment, borrow for fit-out, and use trade credit for inventory.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 386 - AN ACT TO ORDAIN AND INSTITUTE THE CIVIL CODE OF THE PHILIPPINES

• REPUBLIC ACT NO. 11232 - AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.