What Is Item 10 in an FDD? Franchisor-Offered and Franchisor-Arranged Financing

Item 10 — Financing discloses any direct or indirect financing that the franchisor or its affiliates offer to franchisees, or arrange through third-party lenders. In most modern systems, the franchisor offers no financing at all, and Item 10 is a single short paragraph saying so. When financing is offered, however, Item 10 becomes one of the most consequential items in the FDD — the terms, the rights of the lender on default, and the connection between the loan and the franchise agreement can materially change the franchisee's risk profile.

What Item 10 requires

The FTC Franchise Rule at 16 CFR §436.5(j) requires the franchisor to disclose the material terms and conditions of any financing arrangement that the franchisor, its agents, or its affiliates offer directly or indirectly to franchisees. "Indirect" includes arrangements where the franchisor has a relationship with a third-party lender that benefits the franchisor — referral fees, interest in the lender, or co-marketed loan programs.

For each financing arrangement, Item 10 must disclose:

• What is being financed — the initial fee, the equipment package, leasehold improvements, real estate, opening inventory, working capital, or some combination.
• The lender — the franchisor itself, an affiliate, or an arranged third-party lender.
• The principal amount, interest rate, and term — including whether the rate is fixed or variable, the index for variable rates, and any prepayment terms.
• Required collateral and personal guarantees, including any security interests in the franchised business or in personal assets of the franchisee.
• Any waivers of defenses — provisions where the franchisee gives up the right to fight the lender even if they have a valid claim against the franchisor (for example, a claim that the franchisor broke the franchise agreement).
• The franchisor's interest in the financing — referral fees, commissions, profit participation, or revenue from the lender.
• The consequences of default, including the franchisor's or lender's rights to accelerate, repossess, terminate the franchise agreement, or pursue collection against personal guarantors.

A tabular summary is required, with detailed terms in narrative form and copies of any standard financing agreements attached as exhibits.

What it actually tells you

In practice, Item 10 takes one of three forms:

No financing offered. The most common case. The disclosure reads, in substance: "We do not offer direct or indirect financing. We do not guarantee your note, lease, or obligation." This is a complete disclosure — it tells the prospective franchisee that all financing must be obtained from external sources, most commonly SBA-backed loans (loans partly guaranteed by the U.S. Small Business Administration, the dominant funding source for new franchisees), conventional bank financing, equipment leasing, or owner equity.

Direct financing of specific components. Some franchisors finance the initial franchise fee, allowing the franchisee to pay it over the first 12–36 months of operation rather than at signing. A smaller number finance equipment packages or leasehold improvements. Direct financing typically carries terms favorable to the franchisor on default — including the right to accelerate the loan and terminate the franchise agreement on the same default event.

Arranged third-party financing. The franchisor maintains a relationship with one or more lenders (often SBA-preferred lenders familiar with the brand) and refers franchisees to them. The franchisor typically does not guarantee the loan but may receive a referral fee or have an information-sharing arrangement with the lender. The disclosure must describe the relationship.

A small number of brands operate captive finance subsidiaries that are affiliates of the franchisor. These are functionally direct financing and must be disclosed as such.

The "we do not offer financing" disclosure is itself information

Reading the absence of financing as no-news is a common misread. A franchisor's decision not to offer financing reflects a deliberate allocation of risk: the franchisee bears 100% of the financing risk, and the franchisor carries no exposure to the franchisee's credit. Most modern systems prefer this allocation because:

• SBA loans (the 7(a) program in particular — the SBA's main general-purpose loan program) are the dominant financing channel for new franchisees and require no franchisor capital.
• Direct financing creates a creditor-debtor relationship that can complicate the franchise relationship — particularly on default, where the franchisor may face conflicting incentives as both franchisor and lender.
• Arranged financing exposes the franchisor to potential lender-liability claims and to disclosure complexity.

The "no financing" disclosure is the industry default rather than an outlier. What it implies in any specific case depends on the external financing the prospective franchisee plans to use and whether the brand is listed on the SBA Franchise Directory (most are; some are not).

What it does NOT tell you

Several questions are not answered by Item 10:

• Whether you can get an SBA loan or conventional financing. Item 10 covers franchisor financing only. Third-party lender decisions depend on your credit, collateral, business plan, and the lender's view of the brand. The SBA Franchise Directory (a separate resource maintained by the SBA) lists brands eligible for SBA-backed loans.
• The total cost of borrowing. Item 10 discloses the terms of franchisor financing, if any. The total interest cost over the life of the loan, the cash-flow impact of debt service, and the debt-service-coverage ratio (a quick test lenders use: does the business throw off enough cash each year to cover loan payments comfortably?) are not in Item 10 — they belong in the franchisee's own pro forma (a written projection of revenue and costs for the unit).
• The lender's underwriting criteria. Even when the franchisor refers franchisees to a preferred lender, the lender independently underwrites each application. Approval rates and average terms are not in the FDD.
• Whether the franchisor has waived defenses or modified your rights. Some franchisor financing agreements include provisions where the franchisee agrees not to assert against the lender claims they could assert against the franchisor (for example, a claim that the franchisor breached the franchise agreement). These waivers are required to be disclosed but are easy to miss in dense terms.

Reading tips

A few practical habits:

1. Read the no-financing disclosure literally. "We do not offer direct or indirect financing" is a complete statement. If financing is offered through any channel — affiliate, referral, captive — it must appear in Item 10. If the disclosure is comprehensive, all your financing planning happens elsewhere.

2. If financing is offered, read the default provisions first. The most consequential terms in any financing arrangement are what happens on default. Look for: cross-default with the franchise agreement (defaulting on the loan automatically counts as defaulting on the franchise contract too, and vice versa), acceleration rights (the lender can demand the entire balance immediately), repossession of equipment or fixtures, the lender's right to operate the unit during foreclosure, and whether personal guarantees survive termination.

3. Note any waivers of defenses. Provisions where the franchisee waives the right to assert franchise-agreement-based defenses against the lender effectively decouple the loan from the franchise relationship. The franchisee must pay the loan even if they have a valid claim against the franchisor.

4. Identify the franchisor's revenue from the financing. Referral fees, profit participation, and affiliate-lender ownership are all forms of franchisor revenue connected to the financing decision. The disclosure must include these; the level of detail varies.

5. Check Item 7 for financing assumptions. Item 7's initial investment table sometimes includes a footnote on whether the figures assume financing or all-cash. If the high estimate assumes financing, the franchisee's actual cash requirement may differ.

6. Watch the lender list across vintages. A franchisor that adds an affiliate lender, discontinues a third-party program, or newly discloses a referral fee has changed the economics of how the financing decision is made — none of which is required to be flagged at the front of the document.

Red flags to watch for

Disclosures that warrant a follow-up question:

• Cross-default provisions that link the financing default to franchise-agreement termination, especially when paired with the lender's right to step into the franchisee's role.
• Broad waivers of franchisee defenses against the lender, particularly where the lender is an affiliate.
• Variable rates without disclosed caps, especially in long-term financing where rate movements can materially change the debt-service burden.
• Personal guarantees that survive termination of the franchise agreement, leaving the franchisee personally liable for the loan even if the underlying business is closed by the franchisor.
• Undisclosed or vaguely-disclosed referral fees to the franchisor from an "independent" lender.

Item 10 is short in most FDDs and important to read carefully when it is not. Together with Item 5 vs Item 7 (the cost of getting in) and Item 9 (the contractual map), Item 10 completes the picture of how a franchisee funds, opens, and sustains the unit.