Franchisor Financing: What Item 10 Makes You Disclose Before You Offer It

You already know a candidate who cannot cover the initial fee may walk. The part development teams skip is that franchisor financing, meaning any loan, fee deferral or arranged credit that you or an affiliate extend to a franchisee, becomes a disclosed lending product under Item 10 of your FDD, and it pays only when the interest you earn outruns the notes that default. Offer it when your expected default rate stays below a break-even you can calculate. Skip it when you cannot.

What does franchisor financing have to disclose in Item 10?

Item 10 of the FDD must describe the terms of each financing arrangement a franchisor offers, including leases and installment contracts, under the FTC Franchise Rule at 16 CFR 436.5(j). The rule asks for four things: the loan terms, any waiver of the franchisee's legal defenses, any plan to sell the note, and any payment you receive for placing financing.

Each of the four parts is specific. The terms cover what the financing is for, who the lender is and how it relates to you, the amount, interest, repayment period, security, guarantees, prepayment rules and default liabilities. The waiver question asks whether the franchisee gives up legal rights or defenses, for example through a confession of judgment. The assignment question asks whether you plan to sell, assign or discount the note to a third party, and it requires you to state the risk that the franchisee loses defenses against the lender. The placement question asks whether you or an affiliate are paid for steering a franchisee to a lender.

Those answers sit in the FDD a candidate receives before signing. This post covers the federal rule as published in October 2026 and nothing else. State franchise laws may add their own requirements, so confirm yours with counsel.

What does a financed franchise fee cost each side?

A financed franchise fee costs the candidate interest on the balance and costs the franchisor the unpaid balance of any note that defaults. In the example below, a $30,000 note earns the franchisor a net spread of about $1,455 when it pays in full, and one default at month 12 erases the spread from about 14 performing notes.

Take an illustrative $45,000 initial fee. The franchisor collects $15,000 at signing and finances $30,000 over 36 months at 10 percent, which is prime plus 3 points. The Federal Reserve's H.15 release dated October 29, 2026 shows the bank prime loan rate at 7.00 percent for October 22 through 28, and the example treats 7.00 percent as the franchisor's cost of the cash it lends. These terms are for illustration, not a recommendation.

Step one is the payment. At 10 percent over 36 months, the monthly payment on $30,000 is $968.02, so the candidate pays $34,848.56 in total. That is $4,848.56 of interest, or 16.2 percent of the amount financed.

Step two is the cost of funds. Charging 7.00 percent on the declining balance of the same note costs the franchisor $3,393.99. The net spread on a note that pays in full is $4,848.56 minus $3,393.99, which is $1,454.57.

Step three is the loss. If the franchisee defaults after 12 payments, the unpaid principal is $20,977.73. Assume no recovery from collateral or guarantees, which is harsh but keeps the arithmetic clean.

Step four is the break-even. The break-even default rate is the spread divided by the spread plus the loss: $1,454.57 divided by $22,432.30 is 6.5 percent. Put differently, one default for every 15 notes or so cancels everything the other 14 earn. Your own terms will move the numbers, but the shape stays the same. The spread is small, the loss is large, and the default rate decides the result.

When does franchisor financing help a candidate sign?

Franchisor financing helps when the candidate's problem is timing and not solvency, for example when a verified lender funds after the fee is due. It does not help when the candidate lacks the capital to open. The Federal Reserve's Small Business Credit Survey shows how often outside financing falls short, though it covers small employer firms and not franchisees specifically.

The Fed's 2026 Report on Employer Firms, based on a survey fielded from September 3 to November 14, 2025, found that 42 percent of applicants received the full amount of financing they sought, 36 percent received some or most of it, and 22 percent received none. A candidate in the 36 percent group has a gap you could close with a short note, if the rest of the plan holds. A candidate in the 22 percent group has a different problem, and a note from you does not solve it.

Candidates also have other routes, covered in our comparison of SBA loans, ROBS and the newer equity rules. Your financing belongs behind those options, not ahead of them.

When should you not finance the fee yourself?

Three situations argue against it. The first is a solvency gap. If a candidate's liquid capital does not cover the fee, the build-out and the first months of operating cash, a note from you turns a lost sale into a credit loss. A financed fee also does nothing for the working capital gap new franchisees hit after opening.

The second is a plan to sell the paper. If you intend to sell or discount the notes, Item 10 requires you to say so and to state the risk that franchisees lose defenses against the lender, which gives a candidate's advisor a reason to push back on the whole package. The third is unverified funds. Lending to a candidate whose liquidity you never checked is the weakest position to lend from, and what discovery day never verifies about candidate funds is where that gap usually starts.

A four-question screen before you add franchisor financing

Score one point for each yes. Question one: is your trailing outlet termination rate, from your own Item 20, below the break-even default rate you calculated? Terminations are not the same as note defaults, so treat this as a ceiling check and not a forecast. Question two: can you hold the notes on your balance sheet without selling them? Question three: have you verified the candidate's liquid capital separately from the financing? Question four: has your franchise counsel confirmed which state rules apply when a franchisor lends?

Four yes answers support a program with a cap on total notes outstanding. Three support a pilot with a handful of notes. Two or fewer mean the fee is better collected up front or lowered.

How many notes can you afford to carry?

Size the program to the losses you can absorb in a bad year, not to the sales you hope to win. If your balance sheet can take about $63,000 of losses, that is three defaults at $20,977.73 each, or $62,933.19. At the 6.5 percent break-even, three defaults supports about 46 notes outstanding, because 3 divided by 0.0648 is roughly 46. If your real default rate runs above 6.5 percent, the same cap supports fewer.

Revscale's FranFinance syncs QuickBooks data daily and flags trends such as shrinking margins, which is the unit-level signal you need to spot a note at risk before it defaults. Whatever tools you use, run the break-even against your own Item 20 history this week. If your termination rate sits above it, franchisor financing costs more than it earns and the fee is better collected at signing. This is general information, not legal, tax or financial advice; confirm specifics with a qualified advisor.