FDD Item 10: Financing Explained
Item 10 of the franchise disclosure document discloses the terms of any financing the franchisor, its agent, or its affiliates offer to the franchisee, directly or indirectly. If the franchisor offers no financing, Item 10 says so. Item 10 is governed by 16 CFR 436.5(j).
What Is Item 10 of the FDD?
Item 10 is the financing section of the franchise disclosure document. It tells prospective franchisees whether the franchisor offers to finance any part of the investment and, if so, on what terms.
The disclosure requirements are codified under 16 CFR 436.5(j) and enforced by the Federal Trade Commission.
Item 10 covers financing arrangements that the franchisor makes available. It does not cover outside financing a franchisee arranges on its own, such as a conventional bank loan or an SBA loan the franchisor is not party to. Many franchisors offer no direct financing at all, and Item 10 discloses that plainly.
What Must Be Disclosed in Item 10?
What the Financing Covers
The franchisor states what each arrangement finances, such as the initial franchise fee, site acquisition, construction or remodeling, equipment or fixtures, opening or ongoing inventory, or other continuing expenses.
A single franchisor may offer separate arrangements for different costs, and each is disclosed on its own terms.
The Lender and Its Relationship to the Franchisor
Item 10 identifies each lender providing the financing and its relationship to the franchisor, such as an affiliate.
This matters because financing offered through an affiliated lender can carry different incentives than an arm's-length arrangement, and the disclosure makes that relationship visible to the candidate.
The Terms of the Financing
The franchisor discloses the amount financed or the percentage of the cost covered, the interest rate plus finance charges on an annual basis, the number of payments or repayment period, any required security interest, and whether prepayment is allowed along with any prepayment penalty.
Franchisors may summarize these terms in a table, using footnotes to add detail.
Direct and Indirect Financing
Item 10 covers both financing the franchisor extends itself and financing it arranges through others.
Direct Financing
Direct financing is offered by the franchisor, its agent, or an affiliate. This includes installment plans for the initial fee, leases for equipment or real estate, and similar arrangements where the franchise organization is the source of the funds.
Indirect Financing
Indirect financing includes written arrangements with an outside lender to offer financing to franchisees, arrangements where the franchisor or an affiliate receives a benefit from a lender for placing a franchisee’s financing, and the franchisor’s guarantee of a note, lease, or other obligation of the franchisee.
Where the franchisor or an affiliate receives payment for placing financing with a lender, Item 10 discloses the amount or method of determining it and identifies the source.
How Item 10 Connects to Other FDD Items
Item 10 reads alongside several other items that describe the cost of the franchise and how those costs are paid.
Item 5 discloses the initial fees and Item 6 discloses ongoing fees, and Item 10 explains any arrangement to finance amounts disclosed there. Item 7 sets out the estimated initial investment, and its footnotes cross-reference Item 10 when the franchisor or an affiliate finances part of that investment.
Item 8 covers required purchases and leases that a financing arrangement may fund. The financing documents themselves are typically included as exhibits under Item 22. Sample copies of the financing documents are also attached as exhibits to the disclosure document.
Waivers, Assignments, and Default
Beyond the basic terms, Item 10 discloses provisions that affect the franchisee’s legal position under the financing.
Waivers of Legal Rights
If a loan agreement requires the franchisee to waive defenses or other legal rights, such as through a confession of judgment, or bars the franchisee from asserting a defense against the lender or the franchisor, Item 10 describes those provisions.
Sale or Assignment of the Loan
If the franchisor’s practice or intent is to sell, assign, or discount the financing to a third party, Item 10 states the assignment terms and discloses that the franchisee may lose its defenses against the lender as a result.
Liabilities Upon Default
Item 10 discloses what the franchisee faces on default, including any accelerated obligation to pay the full amount due, responsibility for court costs and attorney’s fees, termination of the franchise, and liabilities arising from cross-defaults.
Common Mistakes Franchisors Make With Item 10
Omitting Indirect Arrangements
Franchisors sometimes disclose only the financing they extend directly and overlook indirect arrangements.
A guarantee of a franchisee’s obligation, or a benefit received for placing financing with an outside lender, is disclosable even when the franchisor is not the lender. Leaving these out understates the franchisor’s role in the financing.
Incomplete Terms
Item 10 asks for specific terms, including the annual interest rate with finance charges, the repayment period, security interests, and default consequences.
Disclosing a financing offer without these details leaves the section incomplete. Each arrangement needs its full set of terms, whether presented in prose or in a table with footnotes.
Outdated Rates and Terms
Interest rates and financing terms change, and an Item 10 that carries last year’s figures can misstate the current offer.
The section should be reviewed each time the FDD is updated so that the disclosed terms match what the franchisor and its lenders actually offer.
Franchise Genesis
How Franchise Genesis Helps Franchisors Prepare Item 10
Item 10 requires care whether or not a franchisor offers financing. A franchisor with no financing program needs a clear statement to that effect, and a franchisor that does offer financing needs every arrangement disclosed with complete and current terms.
Franchise Genesis works with franchisors to prepare a franchise disclosure document that is accurate, compliant, and built to support franchise sales.
Experienced franchise attorneys are included in the development program. They help franchisors document direct and indirect financing arrangements, disclose the required terms, and keep Item 10 aligned with the financing documents attached to the FDD.
Frequently Asked Questions
Item 10 discloses the terms of any financing the franchisor, its agent, or its affiliates offer to the franchisee, directly or indirectly. If no financing is offered, Item 10 states that. It is governed by 16 CFR 436.5(j).
No. Franchisors are not required to offer financing. When a franchisor offers none, Item 10 discloses that no financing arrangements are available.
No. Item 10 covers financing the franchisor, its agent, or its affiliates make available. Outside financing a franchisee arranges on its own, such as a conventional bank loan or an SBA loan, is not disclosed in Item 10.
Indirect financing includes arrangements with an outside lender to finance franchisees, benefits the franchisor or an affiliate receives for placing a franchisee’s financing, and the franchisor’s guarantee of a franchisee’s note, lease, or other obligation.
Yes. Interest rates, repayment terms, and lender relationships can change, so Item 10 should be reviewed and updated whenever the FDD is amended so the disclosed terms remain accurate.