Financial and fair trade authorities are taking steps to block unfair lending practices by franchise headquarters that provide high-interest loans to franchise owners using policy funds.
On May 10, the Financial Services Commission and the Fair Trade Commission announced measures to address high-interest unfair loans by franchise headquarters utilizing policy funds. This follows an investigation prompted by cases such as Myungnyun-dang, a Korean BBQ franchise, which revealed three instances of franchise headquarters offering high-interest loans to franchise owners after receiving policy loans.
According to the authorities, Myungnyun-dang accessed low-interest funds from policy financial institutions, such as the Industrial Bank of Korea, at rates between 3% and 6% annually. Subsequently, the company lent approximately 89.9 billion won to 13 affiliated lending firms established by its major shareholders, which in turn provided high-interest loans ranging from 12% to 18% to franchise owners under the guise of covering interior costs.
The total amount of loans executed for Myungnyun-dang franchise owners reached 145.1 billion won from September 2022 to August of the previous year. The investigation also uncovered that the affiliated lending firms managed their total assets to remain below 10 billion won to evade registration requirements set by the Financial Services Commission, raising suspicions of so-called “splitting registration” to avoid scrutiny by the Financial Supervisory Service. However, it is reported that Myungnyun-dang has since returned all its lending licenses.
Similar structures were found in other franchise headquarters. One franchise utilized 1.2 billion won in bank funds, guaranteed by the Korea Credit Guarantee Fund, at an interest rate of 4%, while providing loans totaling 11.4 billion won at 13% to 112 franchise owners through an affiliated lending firm established by its CEO.
Authorities believe that a structure has formed where franchise headquarters expand their businesses using low-interest policy funds while imposing high-interest loan burdens on franchise owners. Notably, it was confirmed that the loan amounts received by franchise owners were used for opening costs, such as interior expenses, and that the repayment of principal and interest was often tied to sales or added to essential supply payments.
In response, the Financial Services Commission plans to strengthen management of policy loans to franchise headquarters. Moving forward, policy financial institutions must verify whether franchise headquarters hold loans to their franchisees when providing new loans or guarantees. They will also check for misuse of funds and monitor changes in loan amounts or new loans at the time of maturity extensions.
If inappropriate lending practices, such as high-interest loans to franchisees, are confirmed, the supply of policy funds will be restricted. New policy loans and guarantees will be halted, and existing loans and guarantees will face limitations on maturity extensions or be subject to repayment in installments. However, if franchise headquarters voluntarily lower their loan interest rates or resolve issues, they may be exempted from these restrictions.
* This article has been translated by AI.
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