Franchising an Existing Business: Setting Terms for Franchisee Loans and Finance Introductions

When turning an existing business into a franchise, it can be tempting to bridge prospective franchisees’ funding gaps by offering loans or introducing them to financial institutions. However, helping someone open a business is not the same as enabling them to run it sustainably. To build a franchise community in which independent businesses work together, decide what support you will offer—and what you will not promise—before recruitment begins.

1. Separate financial support into three categories and limit the franchisor’s role

Start by distinguishing between providing information, arranging finance and lending directly. If these distinctions are unclear, a recruiter’s statement that “we also provide financial support” could be understood as a guarantee that a loan will be approved or funds released.

• Providing information: Signposting public loan schemes or financial institutions’ advisory services, without assessing whether a loan will be approved.
• Arranging finance: Acting as an intermediary between a prospective franchisee and a lender. Clearly define your responsibilities, such as forwarding documents or negotiating terms.
• Direct lending by the franchisor: Acting as the lender and managing interest, repayments, security and overdue payments.

What matters is what you actually do, not what you call it. Even if you describe your service as “introductions only”, encouraging loan applications or negotiating terms requires a different assessment from simply providing contact details.

Experience in managing the finances of company-owned outlets does not necessarily equip you to manage loans to other businesses safely. If you do not yet have people responsible for credit assessment, payment administration and handling arrears enquiries, you may choose to limit support to providing information. If the franchisor guarantees borrowing, assess the risks of that guarantee separately from those of lending.

2. Check disclosure duties and financial regulation separately

Japan has no single law comprehensively governing all franchise businesses. However, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a “specified chain business” under the Act to provide a written disclosure document containing prescribed information, and explain it, before a franchise agreement is signed.

Whether a business falls within this category is not determined simply by describing it as retail or food service. Check the relevant criteria, including whether it primarily serves small and medium-sized retailers and involves ongoing supplies of goods, or arrangements for their supply, under standardised contracts, management guidance, use of trade marks and payments collected on joining.

Where loans are provided or arranged for franchisees, the statutory disclosures include the interest rate or its calculation method, together with other terms. Financial support is therefore not merely a recruitment incentive: its terms need to be settled before the agreement is signed. Even where statutory disclosure requirements do not apply, it is good practice to explain significant financial obligations and restrictions in writing in advance.

Transactions between franchisors and franchisees are also subject to Japan’s Antimonopoly Act. The Japan Fair Trade Commission’s guidelines on franchise systems explain its approach to issues such as deceptive practices in recruiting franchisees and the imposition of unfair disadvantages through abuse of a superior bargaining position. Avoid arrangements that use financial support as leverage to make franchisees accept disadvantages that have not been explained.

Lending money or acting as an intermediary for loans as a business may also trigger registration and other requirements under the Money Lending Business Act. The position depends on the specific activities and whether any exemptions apply. Do not assume that registration is unnecessary simply because the borrowers are franchisees; seek professional advice before starting. Loan terms also require consideration under the Civil Code, the Interest Rate Restriction Act and the Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates, among other legislation. Preparing a disclosure document does not, by itself, satisfy financial regulatory requirements.

3. Keep franchise approval separate from lending decisions

Being able to obtain a loan does not guarantee that an applicant is suitable to become a franchisee or that an outlet will be profitable. Equally, a franchisor’s approval of an applicant does not mean that a financial institution will approve their loan. Keep the recruitment team’s decision to proceed separate from the assessment of repayment capacity.

Establish the following as a basic internal process:

1. Assess opening costs separately from the working capital needed after opening.
2. Establish the applicant’s own funds, planned borrowing and repayment obligations on existing debt.
3. Consider whether repayments would remain affordable if sales fell short of projections or the opening were delayed.
4. Set out the sequence and conditions for loan approval, signing the franchise agreement, entering into premises agreements and ordering equipment.

Particular care is needed where non-refundable payments or orders that are difficult to cancel are made before finance has been approved. Explain clearly which agreements can be withdrawn from if the loan is refused, and who will bear costs already incurred. Agreements with third parties, such as those relating to premises, do not automatically end when the franchise agreement is cancelled.

In business plans submitted to financial institutions, distinguish between historical performance known to the franchisor and the prospective franchisee’s own projections. Do not adjust assumptions simply to make the application more likely to succeed. Ensure that the assumptions behind sales, costs and loan repayments can be explained.

4. Use a schedule of terms and records of explanations to prevent confusion after opening

Once you have decided what support to offer, ensure that the terms are consistent across the franchise agreement, loan agreement, disclosure document and recruitment materials. A practical checklist should cover at least the following:

• The lender, borrower, purpose of the funds, loan amount and conditions for releasing the funds
• The interest rate or calculation method, any fees, and the repayment method and term
• How interest is treated during any repayment grace period, and the repayment amount once that period ends
• Any security or guarantees, early repayment provisions and treatment of overdue payments
• Outstanding debt and repayment terms if the franchise agreement ends
• The lender to which the applicant is introduced, any introduction or arrangement fees, and what happens if finance is unavailable

Ending the franchise agreement does not automatically extinguish the borrowing. Clauses that make every breach of the franchise agreement trigger immediate repayment in full can also have a substantial impact on a franchisee’s ability to keep trading. Review the circumstances in which a borrower may lose the right to repay over the agreed term with a professional adviser, taking account of the nature of the breach and any opportunity to remedy it.

For verbal explanations, record who gave them, when, which version of the materials was used, and what questions were asked and answered. If application documents are passed to a financial institution, check what personal information will be shared and whether consent is required. Provide a contact point for repayment enquiries after opening, but avoid suggesting that further lending or repayment deferrals will always be granted.

Practical takeaway: Before recruiting franchisees, summarise the scope of financial support on a single sheet and check disclosure obligations, any registration or other requirements, and what happens if finance is refused. Designing support to help franchisees understand their obligations and make informed decisions—rather than simply lending to get outlets open—will help build trust across the franchise community.