Item 10: Financing

Like Item 10 of the UFOC Guidelines, Item 10 of the amended Rule requires franchisors
to disclose all material terms and conditions of any financing arrangements. The required
disclosures include:

  • The rate of interest, plus finance charges, expressed on an annual basis;
  • The number of payments;
  • Penalties upon default; and
  • Any consideration received by the franchisor for referring a prospective franchisee to a lender.

Franchisors may use the tabular format set forth in the Rule to summarize the financing
arrangement, but that format is not required. Disclosure of financing terms and conditions in

Item 10 does not prevent the parties from negotiating different terms and conditions after the
disclosure. As discussed above, however, prospective franchisees will have seven calendar days
to review any changes in financing terms or conditions if the changes were made unilaterally by
the franchisor, because such changes in financing terms or conditions are presumptively material
to the franchisee’s purchasing decision.

Financing Agreements

For purposes of Item 10, the term “financing agreement” includes any “leases and
installment contracts . . . that the franchisor, its agent, or affiliates offer directly or indirectly to
the franchisee.” Indirect offers of financing include a written arrangement between a franchisor
or its affiliates and a lender, where the lender offers financing to a franchisee. It also includes
instances where a franchisor or an affiliate receives a benefit from a lender in exchange for
financing a franchise purchase, as well as instances where the franchisor guarantees a note,
lease, or other obligation of the franchisee. If the franchisor or an affiliate receives a benefit
from the lender, the franchisor must disclose the amount or method of determining the payment,
the source of the payment, and the relationship of the source to the franchisor or its affiliate.
Sample copies of any financing agreements must be included in Item 22.

Interest Rate

Franchisors offering financing must disclose the rate of interest, plus finance charges,
expressed on an annual basis, consistent with consumer credit transactions. Indeed, the interest
rate disclosures are modeled on the disclosures lenders make under the Federal Reserve’s
Regulation M (Consumer Leasing), 12 C.F.R. Part 213, and Regulation Z (Truth in Lending), 12
C.F.R. Part 226. These regulations, however, cover personal property leases and credit
transactions that are “primarily for personal, family, or household purposes.” Accordingly, they
generally do not apply directly to lease and financing transactions undertaken in connection with
the purchase of a franchise. Nonetheless, franchisors may look to the Truth in Lending and
Consumer Leasing regulations for guidance in preparing their Item 10 interest rate disclosures.

Variable Rates

Interest rates or finance charges may fluctuate between the time when the prospective
purchaser receives the disclosure document and the time when he or she actually executes the
financing agreement. Anticipating such a situation, the amended Rule provides disclosure of
what the rate of interest, plus finance charges, expressed on an annual basis, was on a specified
recent date. A franchisor may include a footnote stating that the interest rate may vary or state a
formula by which the rate may change until the financing agreement is signed. Where the rate
may change during the life of the loan, disclosure of that fact is required under the Item 10
“catch-all” requirement, which calls for disclosure of “other material financing terms.”