"Who Starts a Business With Their Own Money These Days?"... Franchise Headquarters Forcing 'Debt-Fueled Startups' [The Pitfalls of Low-Capital Startups] ③

Franchises Aggressively Seek New Owners by Promoting 'No-Capital and Low-Capital Startups'
Head Offices Facilitate High-Interest Loans for Prospective Franchisees
Franchisees Urged to Accept Loans Despite Unfavorable Terms

Editor's NoteIn Korea, starting a franchise business begins with taking on "debt." Self-employed individuals often fall into the trap of aggressive loan recommendations, lured by franchise companies that are eager to expand their networks and promote "low-capital startups." Those who start their businesses with loans find it difficult to make a profit even if sales are good. If business slows even slightly, they are unable to endure and often face bankruptcy. This article examines how aspiring entrepreneurs are enticed by the bait of "low-capital startups" during the franchise process, and how excessive borrowing can lead to dangerous consequences.

"Our headquarters no longer offers direct loans, but we can connect you with other options."

At the franchise expo held at COEX in Seoul on August 22, franchise companies prominently advertised "low-capital startup opportunities," emphasizing that headquarters could help arrange loans so that anyone could start a business-even with existing debt, low credit scores, or no capital at all.

The operations team of Franchise B informed prospective franchisees that if they signed up after the expo, the franchise fee would be temporarily discounted by 50%. They added, "We can provide startup loans of up to 100 million won." When asked for more details about the loans, they explained, "Since these are personal loans through commercial banks, the limits may be low. In that case, there are other options," indirectly suggesting that they could facilitate loan referrals. The representative said, "It's difficult to discuss loans on-site, but we will provide guidance individually after following up." The sales representative from Franchise C also explained that actual startup costs could be 20 to 30 million won higher than the amount initially introduced, adding, "If you leave your contact information, we will consult with you individually regarding loans."

Prospective entrepreneurs are touring booths at the 80th Franchise Startup Expo 2025 held last August at COEX in Gangnam-gu, Seoul. Photo by Lee Hyunju

After the expo, I arranged a separate consultation with the sales team leader from Franchise C. He emphasized points such as "The minimum required capital is calculated excluding the store deposit," and "Even those new to the food and beverage industry can achieve monthly sales of over 100 million won." He also offered to help find a store location if one had not yet been decided.

I then brought up financial matters directly. The headquarters was promoting a limited-time offer on its website: franchise fees at half price and startup loans ranging from 10 million to 50 million won. When I mentioned that my available capital seemed insufficient after accounting for store costs, Team Leader Kim explained without hesitation, "Currently, our headquarters can help you get an interest-free liquor loan, up to 50 million won."

A liquor loan involves borrowing tens of millions of won interest-free from a liquor wholesaler in exchange for signing an exclusive supply contract with that wholesaler. For example, if a store owner receives a 30 million won liquor loan, they sign a contract to repay 1 million won per month for three years. If the supply contract is terminated or the business closes during this period, penalty fees or interest must be paid. During the COVID-19 pandemic, there were many cases of unfavorable liquor loans for store owners, including delayed interest rates of over 20% for payments overdue by just one day.

Various informational booklets distributed by franchise headquarters at the franchise startup expo. They provide information about free support of up to 26 million won and loan support of up to 100 million won. Photo by Lee Hyunju

When I hesitated at the mention of a liquor loan, Team Leader Kim said, "Of course, liquor companies will check your credit score and other factors, but the main thing is your store location. If the location is good, you can get a loan of up to 100 million won," raising the possible loan amount. He added, "If you decide to proceed, we will connect you with the company."

Some franchises also promoted interest-free loans from major credit card companies. Franchise D, at a startup information session held at headquarters last July, highlighted that 12-month interest-free loans for startup funds were available. Part of the startup cost could be paid by credit card, with interest-free support for 12 months. The representative explained, "Credit card loans can range from 20 to 40 million won, but the limit depends on individual credit scores." He added, "It's not truly interest-free; rather, the headquarters covers the interest, and you can choose a repayment plan after consulting with the card company." He also emphasized that "even if your credit score is low, commercial bank startup loans may be possible based on the creditworthiness of the headquarters," showing an awareness that many self-employed individuals have low credit scores and stressing the importance of loans supported by the headquarters.

Franchise companies, in their rush to recruit new franchisees by promoting "zero-capital and low-capital startups," sometimes present inflated profit margins. Fast food franchise E promotes "interest-free startup opportunities," advertising that they can provide interest-free loans of up to 20 million won for initial operating funds. In the "Frequently Asked Questions" section, they state, "No one starts a business with their own funds from the beginning. You can receive various forms of support through consultations with headquarters." While this may appear considerate of franchisees, current and former store owners of this company are engaged in lawsuits against headquarters for damages.

Headquarters promoted a guaranteed operating profit margin of over 20% at the time of the franchise contract, but franchisees claim that after opening, their actual operating profit margins were significantly lower than headquarters' projections, resulting in losses. In April, the court ordered headquarters to pay damages of hundreds of millions of won to six franchisees who filed a lawsuit. In June, 20 more franchisees filed a similar lawsuit, so currently, there are two ongoing damages lawsuits between franchisees and headquarters.

Experts advise exercising caution when selecting a franchise before starting a business. They especially warn that new brands offering extraordinary conditions such as startup cost support and interest-free loans require even more scrutiny.

Lee Jeongmyeong, president of the Korea Franchise Transaction Association, said, "New franchises have yet to prove how long they can survive in the market," and emphasized, "You should question how such headquarters can offer major benefits and guarantee high returns." He added, "Some new franchises hire unqualified consultants, offering rebates for each prospective franchisee they recruit. If you fall for such sales tactics, you may fail to check contract terms and end up in a disadvantageous situation. It is also important to seek advice from certified professionals."