Beyond the Binder: Item 10 – Financing
Franchise Disclosure Documents (FDDs) are packed with details that can make or break a franchise investment. In this edition of Beyond the Binder, we’re tackling Item 10: Financing; one of the most critical sections for prospective franchisees trying to gauge the true cost, risks, and obligations tied to buying into a franchise system.
Understanding Item 10
Item 10 of the FDD discloses whether the franchisor offers financing arrangements directly to franchisees, or whether it arranges financing through third parties. It answers questions such as:
Will the franchisor lend you money to cover your initial fees or buildout?
Will they guarantee loans you get from a bank?
Are there special financing programs or incentives for veterans or minorities?
What are the terms and conditions of those financing arrangements?
In short, Item 10 reveals how (or whether) the franchisor helps you secure funding, and what strings are attached.
What Must Be Disclosed
The FTC Franchise Rule requires that Item 10 detail:
✅ Terms of Financing Offered
Including interest rates, payment schedules, balloon payments, late fees, collateral required, prepayment penalties, and other material terms.
✅ Franchisor’s Role
Whether the franchisor offers financing itself or merely facilitates a relationship with lenders.
✅ Guarantees or Obligations
Whether the franchisor guarantees your obligations to third parties, and any conditions attached to that guarantee.
✅ Defaults and Remedies
A summary of rights the franchisor has if you default on financing, including termination rights.
✅ Past Practices
The number of franchisees who have obtained financing through the franchisor in the last fiscal year, and the number who have been in default.
✅ Assistance with Loans
Whether the franchisor assists with loan applications, negotiating terms, or documentation.
Why It Matters
Item 10 is about much more than “getting a loan.” It directly impacts:
Start-Up Costs: Affordable financing may ease the initial cash burden, but hidden fees or harsh default terms can bury franchisees later.
Franchisor Leverage: Financing tied to the franchisor can mean extra leverage over you if you fall behind on payments.
Cash Flow: The interest rate and repayment terms will influence your monthly cash requirements, crucial for new businesses.
Risk of Default: Aggressive financing structures can create a fragile financial situation, raising the odds of default and, ultimately, losing your business.
Hidden Costs: Some franchisors offer “vendor financing,” where they extend credit but require you to buy equipment or products at inflated prices.
If you want to see just how far franchisors can stretch (or outright dodge) Item 10 disclosures, look no further than our Reality Check Report on I Heart Mac & Cheese. It’s a deep dive into how the brand claimed it offered no financing in its FDDs, while its insiders quietly structured seller-financed deals through affiliated entities, leaving franchisees saddled with undisclosed debt and legal chaos.
Real Due Diligence Tips
Here’s how to dig deeper into Item 10 and avoid costly surprises:
🔍 Request Loan Documents
Don’t rely on summary disclosures. Ask the franchisor (or the bank) for full loan agreements and read them carefully.
🔍 Compare Rates to Market Rates
Franchisor-offered financing isn’t always a deal. Compare the offered terms with commercial loan rates from banks or credit unions.
🔍 Talk to Existing Franchisees
Ask how many franchisees used franchisor financing. Were the terms fair? Did they experience unexpected fees or cash crunches?
🔍 Check for Cross-Defaults
Determine whether defaulting on your financing agreement can trigger termination of your franchise agreement.
🔍 Consult Professionals
Have a franchise attorney and an accountant review any financing arrangements to spot hidden risks or unfair terms.
The Bottom Line
Item 10 can be a lifeline…or a trap. While franchisor financing sometimes opens doors for entrepreneurs who can’t fund a business independently, it can also tie you to terms that favor the franchisor, not you.
Approach Item 10 with eyes wide open. Read every document. Question every term. And remember: no matter how tempting the financing package sounds, you’re the one who ultimately has to pay it back.
Beyond the binder, there’s reality. Know it before you sign.
