FDD Item 10 discloses any financing arrangements the franchisor offers or arranges for franchisees, and understanding these arrangements is critical because the terms of your franchise financing directly affect your profitability, your risk exposure, and your ability to exit the franchise if things do not go as planned. At Lopes Law LLC, our $3,000 FDD validation review includes a detailed analysis of Item 10, because franchise financing arrangements often contain provisions that most prospective franchisees do not fully understand until they are already committed.

This guide covers what Item 10 requires franchisors to disclose, how franchisor-provided financing works, the critical role of the SBA Franchise Directory, when financing arrangements should be viewed as a red flag, and how to evaluate your financing options before committing capital.

What Does FDD Item 10 Require the Franchisor to Disclose?

Under the FTC Franchise Rule, Item 10 must disclose the terms and conditions of any financing arrangement the franchisor offers directly or arranges through third parties. If the franchisor does not offer or arrange any financing, Item 10 must explicitly state that. A simple “we do not offer financing” statement is common in many FDDs.

When financing is offered or arranged, the franchisor must disclose the amount or range of financing available, the interest rate (fixed or variable), the repayment period and schedule, whether a personal guarantee is required, any security interest the franchisor takes (equipment liens, UCC filings), cross-default provisions linking the loan to the franchise agreement, acceleration clauses, and whether the financing is assignable. The franchisor must also disclose whether it receives any compensation from third-party lenders for referring franchisees.

What Types of Franchise Financing Does Item 10 Cover?

Direct Franchisor Financing

Some franchisors finance a portion of the initial investment directly, most commonly the franchise fee itself. For example, a franchisor with a $40,000 franchise fee might allow the franchisee to pay $20,000 at signing and finance the remaining $20,000 over 2 to 3 years at an interest rate of 8% to 12%. This type of financing is convenient but typically carries higher interest rates than bank lending because the franchisor is not a regulated financial institution and is pricing in the risk of franchisee default.

Third-Party Lending Relationships

Many franchisors maintain relationships with preferred lenders, including SBA-approved banks, equipment leasing companies, and franchise-specific lending platforms. Item 10 must disclose these relationships and whether the franchisor receives any referral fees or commissions for directing franchisees to these lenders. Referral compensation does not automatically make the arrangement problematic, but it does create a potential conflict of interest: the franchisor may steer you toward lenders that benefit the franchisor rather than those offering the best terms for the franchisee.

Equipment and Vehicle Leasing

Some franchise systems arrange equipment leases through approved vendors. Item 10 must disclose the terms of these leases, including monthly payments, lease duration, end-of-lease purchase options, and whether the franchisor receives any benefit from the leasing arrangement. Equipment leases are a form of financing that many franchisees do not think of as debt, but they create fixed monthly obligations that affect cash flow.

How Does the SBA Franchise Directory Interact with Item 10?

The SBA maintains a Franchise Directory that lists franchise systems eligible for SBA-backed lending. If a franchise system is on the SBA Franchise Directory, lenders can process SBA 7(a) loans for franchisees using streamlined procedures. This significantly expands the financing options available to prospective franchisees, because SBA loans offer longer repayment terms (10 to 25 years), lower down payment requirements (10% to 20% equity injection), and interest rates that are typically prime plus 2% to 3%.

Not all franchise systems are listed on the SBA Franchise Directory. Some are explicitly excluded because the SBA has determined that the franchise agreement’s terms are inconsistent with SBA lending requirements (for example, franchise agreements that give the franchisor excessive control over the franchisee’s business operations). Others have never applied for listing. If the franchise you are considering is not on the SBA Directory, your lending options are more limited and typically more expensive.

Item 10 does not always mention the SBA Franchise Directory status. If it is not addressed, ask the franchisor directly and verify the listing independently through the SBA’s online directory. This is a straightforward step that can significantly affect your financing costs and options.

When Is Franchisor Financing a Red Flag?

Franchisor-provided or arranged financing is not inherently problematic. Many established franchise systems offer reasonable financing terms that help qualified franchisees access capital. However, several patterns should raise concerns during your review.

• Interest rates significantly above market: If the franchisor is charging 12% to 15% or more when SBA rates are 7% to 9%, the franchisor is profiting from the lending relationship at the franchisee’s expense. Compare Item 10 rates against current SBA 7(a) rates and conventional commercial lending rates.
• Cross-default provisions: As noted above, cross-default clauses link your loan to your franchise agreement. A late loan payment becomes a franchise default. This is unusually aggressive and provides the franchisor with leverage that goes beyond what is standard in most commercial relationships.
• Required use of franchisor financing: If the franchisor effectively requires you to use its financing (either by mandate or by making it extremely difficult to secure outside financing), this limits your ability to shop for competitive terms and may indicate that the franchisor views lending as a profit center rather than a franchisee support tool.
• Confession of judgment clauses: Some financing agreements include confession of judgment provisions that allow the lender to obtain a court judgment against you without notice or an opportunity to defend. These clauses are prohibited or restricted in many states, but they still appear in some franchise financing documents.
• Franchisor financing when banks will not lend: If the only financing available for a franchise is from the franchisor itself, ask why banks and SBA lenders are unwilling to lend. Institutional lenders evaluate franchise systems rigorously, and their refusal to lend to a particular brand can indicate underlying financial or operational problems.

A Client Scenario: When Item 10 Financing Created Hidden Risk

A prospective franchisee was evaluating a home services franchise with a total Item 7 investment of $120,000 to $180,000. The franchisor offered to finance $50,000 of the initial investment at 10% interest over 5 years, with monthly payments of approximately $1,062. On the surface, this appeared to be a helpful financing option that reduced the franchisee’s upfront capital requirement.

When we reviewed the financing agreement at Lopes Law LLC, we identified three provisions that significantly changed the risk profile. First, the financing included a cross-default provision: any default on the loan would automatically trigger a default under the franchise agreement, giving the franchisor grounds for termination. Second, the financing agreement required a personal guarantee from the franchisee and the franchisee’s spouse, even though the spouse was not involved in the franchise business. Third, the agreement included an acceleration clause providing that upon any default, the entire remaining balance would become immediately due and payable.

The practical effect was that if the franchisee missed a single monthly payment of $1,062, the franchisor could simultaneously terminate the franchise agreement, demand immediate payment of the full remaining loan balance (potentially $35,000 to $45,000), and pursue the franchisee’s personal and marital assets to satisfy the debt. For a $50,000 loan, this was an extraordinary level of risk.

We negotiated modifications to the financing agreement that removed the spousal guarantee, added a 30-day cure period before any default could be declared, and eliminated the cross-default provision. The franchisor agreed to these changes after we demonstrated that the original terms were commercially unreasonable and potentially unenforceable in the franchisee’s state.

How to Evaluate Your Franchise Financing Options

Whether the franchisor offers financing or you are securing your own, here are the key considerations for franchise financing decisions.

1. Check the SBA Franchise Directory first. If the franchise is SBA-approved, explore SBA 7(a) lending as your primary financing option. SBA loans typically offer the best combination of rates, terms, and borrower protections.
2. Compare franchisor financing against market alternatives. If Item 10 discloses franchisor financing, compare the interest rate, repayment term, and total cost of borrowing against SBA loans, conventional commercial loans, and equipment leasing options from independent lenders.
3. Read every financing document with a lawyer. Do not sign any financing agreement without having a franchise attorney review the specific terms, particularly personal guarantees, cross-default provisions, acceleration clauses, and security interests.
4. Model the debt service into your financial projections. Use the Item 19 financial performance data to model whether the franchise’s projected revenue can support the debt service payments while still providing adequate owner compensation and operating reserves.
5. Understand what happens if you default. Before signing any financing agreement, understand the worst-case scenario: what assets are at risk, what the franchisor can do if you miss payments, and whether your franchise and your personal finances are protected if the business underperforms.

At Lopes Law LLC, our $3,000 flat-fee FDD validation review includes analysis of all financing arrangements disclosed in Item 10. We evaluate the terms against market standards, identify provisions that create unusual risk, and advise on negotiation strategies. For more on our review process, see our guide on what to expect from an FDD review.

Frequently Asked Questions About FDD Item 10

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Last updated: March 13, 2026