Franchise Loans from Major Banks Plummet... Small Business Owners Driven to Secondary Lenders and Private Loans [The Trap of Low-Capital Startups] ④

"High Interest Rates, But No Problem Repaying Loans"
Franchise Industry Encourages Private Lending and Liquor-Linked Loans
Risk of Bad Loans Turning Into Toxic Debt

Editor's NoteIn South Korea, starting a franchise business often begins with taking on debt. Many self-employed individuals fall prey to the lure of "low-capital startups" promoted by franchises eager to expand their network, only to find themselves trapped by aggressive loan recommendations. Even if these entrepreneurs generate sales, it is difficult for them to realize a profit due to the burden of debt. If their business underperforms even slightly, they are unable to sustain operations and are pushed into bankruptcy. This article examines how self-employed individuals are enticed by the promise of "low-capital startups" during the franchise process, and how excessive loans can lead to dangerous consequences.

Although commercial banks offer "franchise loans" for self-employed individuals lacking startup capital, it has been revealed that the franchise industry often encourages borrowers to take out larger, higher-interest loans through secondary financial institutions, liquor loans, or loans connected to private lenders introduced by the franchise headquarters. Franchise loans are financial products in which banks lend funds needed to open new franchise locations. While these loans offer relatively low interest rates starting at around 4%, the application requirements are strict.

According to data submitted by the office of Assemblyman Kim Namgeun of the Democratic Party, a member of the National Assembly's Political Affairs Committee, to the Financial Supervisory Service on October 12, the number and total amount of franchise loans handled by commercial banks have significantly decreased over the past five years. The number of franchise loans issued by the four major commercial banks-KB Kookmin Bank, Shinhan Bank, Woori Bank, and Hana Bank-reached 1,331 in 2021, but as of the end of August this year, only 453 had been issued. By bank, KB Kookmin Bank saw the sharpest decline, from 167 loans to just 13 during the same period. Shinhan Bank dropped from 492 to 59, Woori Bank from 52 to 14, and Hana Bank from 520 to 367.

The total amount of franchise loans has also dropped significantly. The four major commercial banks issued a combined 77.338 billion won in franchise loans in 2021, 56.870 billion won in 2022, 48.728 billion won in 2023, and 39.799 billion won in 2024, showing a steady annual decline. As of August this year, the amount stood at 27.852 billion won, making it highly likely that the record for "all-time low" set last year will be broken if this trend continues.

Franchise loans have a critical flaw: loan limits and interest rates vary depending on the franchisee's personal credit rating, making them inaccessible to those with low credit scores. For example, the "KB Franchise Loan" offered by KB Kookmin Bank requires a minimum credit rating of 6 or higher on the bank's proprietary credit scale for self-employed individuals (retail-type SOHO credit rating). Similarly, Shinhan Bank's franchise loan is only available to customers with a BB- or higher credit rating as assessed by the bank. An industry insider stated, "Even if a loan is in progress, if the applicant is undergoing individual rehabilitation or has personal credit issues, the loan consultation can be halted."

Franchises that are desperate to expand their network have been found to actively recommend loans from secondary financial institutions and private lenders to franchisees who are rejected by primary financial institutions. When prospective franchisees inquire about startup loans from franchises that advertise support for loans from primary financial institutions, they often receive responses such as, "Loan products offered by savings banks or capital companies have relatively more flexible screening compared to those from primary financial institutions." This is the context behind such statements.

The banking industry has also reported a sharp decline in franchise loan requests recently.

A bank official explained, "The loan limit for franchise loans is determined based on the borrower's operating funds, credit rating, and the amount of existing unsecured loans," adding, "Recently, due to rising prices and the economic downturn, franchisees have seen a decline in sales, and both default and closure rates have increased, leading to a rapid decrease in the volume of franchise loans." Another bank official added, "Delinquency rates among small business owners are also rising, so banks are conducting stricter screenings as part of their risk management. I have also heard that the franchise industry now has a wider variety of loan products it can recommend to new franchisees beyond just franchise loans."

Even though the volume of franchise loans from commercial banks has decreased, the number of franchise locations continues to grow, driven by the active provision of loans from secondary financial institutions, liquor loans, and loans linked to private lenders for those seeking low-capital startups. The number of franchise locations reached 365,014 last year, a 3.4% increase from the previous year. In 2023, the growth rate of franchise locations was as high as 5.2%.

Ryu Pilseon, a senior expert at the Korea Federation of Micro Enterprises, stated, "Even though the number and total amount of franchise loans from commercial banks have plummeted, the number of new franchise locations has not decreased, which means that many loans are being obtained through other financial sectors." He continued, "It has become common practice in the industry for franchise headquarters to arrange loans through savings banks or private lenders." Ryu further noted, "One reason is that the recent economic downturn has significantly lowered the credit ratings of self-employed individuals. Bad loans turn into toxic debt, and ultimately, only self-employed individuals are driven to the brink."

There are also calls for commercial banks to actively promote their low-interest loan products to prevent franchisees from being overwhelmed by excessive debt, and for franchise headquarters to take responsibility for preventing moral hazard. Assemblyman Kim Namgeun stated, "Promoting loans from commercial banks but actually arranging high-interest loans from secondary financial institutions or private lenders may constitute the provision of false or exaggerated information, which is prohibited under the Franchise Business Act." He added, "The Fair Trade Commission should strengthen its oversight and conduct thorough investigations into these practices."