Franchise offices offering high-interest loans to franchisees will encounter limitations on policy financing, and the transparency of loan details provided or associated with franchise headquarters prior to signing a contract will be increased.
The Korea Fair Trade Commission (KFTC) and the Financial Services Commission (FSC) revealed on the 10th actions aimed at tackling unjust high-interest loans offered by specific franchise headquarters. These regulations come in response to concerns raised last year, suggesting that some franchise companies, such as Myeong Ryun Jinsa Galbi (a brand under Myeong Ryun Jinsa Galbi), obtained low-interest financing from policy banks and then extended high-interest loans to their franchisees, merging their franchise activities with lending operations.
◇”High-Interest Loans, Chains Restraining Small Business Owners”
The KFTC and FSC carried out a survey between October of the previous year and January of this year, focusing on 110 franchise headquarters and franchisees to detect instances where franchise companies provided loans directly or indirectly to their franchisees. The inquiry found three cases of high-interest loans given to franchisees by franchise headquarters, including Myeong Ryun Jinsa Galbi, plus one more case.
Myeong Ryun Jinsa Galbi, which encountered problems last year, secured hundreds of billions of South Korean won at an interest rate ranging from 3 to 6% from policy-oriented financial organizations such as the Korea Development Bank. It subsequently provided around 90 billion South Korean won to 14 lending companies set up by its primary shareholders, who then offered high-interest loans of 12 to 18% per year to franchisees for expenses like interior improvements.
Throughout this process, 14 affiliated lending companies were discovered to have managed their total assets under 10 billion South Korean won in an attempt to bypass the FSC’s registration criteria, which require “total assets of 10 billion South Korean won and outstanding loans of 5 billion South Korean won.” Concerns emerged about the fragmentation of registrations to avoid FSS inspections and the improper use of lending companies for personal benefit by major shareholders. The KFTC submitted an inspection report to the company on the 8th concerning Myeong Ryun Jinsa Galbi’s alleged unfair treatment of franchisees and forced transactions (violations of the Franchise Business Act) and has begun the deliberation process.
The KFTC determined that these high-interest loans from franchise headquarters serve as constraints that keep franchisees tied to their businesses. A KFTC representative said, “Franchise headquarters can easily benefit from internal construction and minimize default risks by recouping loan principal and interest through required product supplies, but franchisees face difficulties in closing their businesses if initial sales increases decline, leaving them with ongoing loan payments.”
◇Franchise Headquarters Offering High-Interest Loans Encounter Policy Loan Limitations
The authorities will enhance oversight of policy loans provided to franchise headquarters to tackle these concerns.
When franchise headquarters are registered with the KFTC or local authorities, policy financial institutions—such as the Korea Development Bank, Small and Medium Business Bank, Korea Credit Guarantee Fund, and Korea Technology Finance Corporation (KOTEC)—will thoroughly examine throughout all policy loan procedures whether the headquarters directly or indirectly offer loans to franchisees. They will review the headquarters and related companies for loans to franchisees, loan terms, changes in loan amounts, and new loan activities during new loan/guarantee assessments, misuse checks, and extensions of repayment periods.
If improper loans to franchisees, like those with high interest rates, are discovered, financial support will be limited. New policy-related loans or guarantees will be restricted for situations considered unsuitable, while current loans or guarantees might have their repayment periods limited or require installment payments.
Furthermore, the information sharing system will be updated to enable potential franchisees to examine credit terms or brokerage requirements prior to entering into agreements. Loan specifics—such as interest rates, payment methods, stipulations, and connections between the franchise headquarters and financial institutions—will be organized and made available during the establishment and ongoing operations phases. The KFTC mentioned, “This will avoid confusion arising only from phrases like ‘startup assistance’ or ‘favorable loans’ and will make the real financial terms and interests clear.”
To resolve issues where franchisees cannot track loan repayments made by headquarters on their behalf, financial companies will be instructed to directly notify franchisees whether principal and interest have been paid. Institutional improvements will also be pursued to eliminate regulatory disparities between FSC-registered and local government-registered lenders, preventing incentives for fragmented registrations.
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