If you're planning to buy a franchise and need a loan to finance it, the Franchise Disclosure Document—or FDD—is one of the most important tools in the process. This legal document outlines critical details about the franchise opportunity and plays a major role in whether lenders approve your loan.
Understanding how the FDD works, what it includes, and how to use it can improve your chances of getting funded and making a smart investment.
An FDD is a legal document that franchisors are required to provide to prospective franchisees under the Federal Trade Commission’s Franchise Rule. It includes 23 standardized sections (called “Items”) that disclose essential information about the franchise, its operations, financials, and legal history.
You must receive the FDD at least 14 days before signing any franchise agreement or paying any fees.
Lenders use the FDD to evaluate the legitimacy, risk level, and financial stability of the franchise you’re investing in. A well-structured FDD helps them answer:
Is the franchisor financially sound?
Are other franchisees profitable?
What are the start-up and ongoing costs?
Has the franchisor been involved in litigation?
How long does it typically take to break even?
A strong FDD can give lenders confidence in your business model—making loan approval more likely.
Item 5 – Initial Fees
Outlines upfront costs such as the franchise fee. Lenders use this to assess the total capital you'll need.
Item 6 – Other Fees
Breaks down ongoing fees like royalties, marketing contributions, and tech support charges. Helps lenders forecast your monthly obligations.
Item 7 – Estimated Initial Investment
Gives a detailed list of expected start-up costs (e.g., equipment, inventory, rent). This helps shape your loan amount and repayment plan.
Item 19 – Financial Performance Representations
Also called an “Earnings Claim.” This section, if included, shows historical sales and profit data for existing franchises. Lenders use this to model potential cash flow.
Item 21 – Financial Statements
Discloses the franchisor’s audited financials. Weak or inconsistent statements can raise red flags.
Item 20 – Outlets and Franchisee Info
Details how many units have opened, closed, or transferred in recent years. A high closure rate can concern lenders.
Lenders love data. The more organized and transparent you are with the FDD, the easier it is for them to say yes.
Tips:
Include relevant FDD sections in your business plan
Reference Item 7 to justify loan amount requests
Use Item 19 (if available) to support revenue forecasts
Prepare a profitability timeline based on other franchisee results
Show you understand royalty fees and how they impact cash flow
When you demonstrate mastery of the FDD, lenders are more likely to view you as a prepared, low-risk borrower.
SBA 7(a) Loans
Government-backed loans up to $5 million. Many franchisors are SBA-approved, streamlining the process.
SBA Express Loans
Faster approvals for loans up to $500,000. Great for less capital-intensive franchises.
Franchise-Specific Loans from Banks or Lenders
Some banks and online lenders offer loans tailored to top franchise brands. These programs often have pre-approved terms.
Equipment Financing
Useful if a major portion of your start-up cost is machinery, tech, or restaurant equipment.
Read the entire FDD thoroughly—don’t skim
Highlight Items 5–7 and 19–21 for lender use
Gather questions to ask the franchisor before applying
Cross-reference Item 7 with your funding needs
Use Item 19 (if included) to create a projected P&L
Include FDD data in your franchise business plan
Partner with a lender familiar with franchise loans
This approach shows preparedness, lowers risk perception, and improves approval odds.
Ignoring FDD Items that affect operating costs
Requesting less financing than Item 7 recommends
Overestimating profits without support from Item 19
Failing to disclose Item 21 concerns to your lender
Not asking for help interpreting complex sections
If you're unsure about any part of the FDD, consult a franchise attorney or advisor.
FTC Franchise Rule Guide – Learn your legal rights
SBA Franchise Directory – See if your franchise is SBA-eligible
FranData – Offers detailed franchise research and lender data
Nav Loan Match Tool – Find financing options based on your franchise profile
These resources can help you evaluate a franchise opportunity and secure funding more easily.
Understanding the Franchise Disclosure Document isn’t just about legal compliance—it’s a strategic advantage. By using the FDD to build a compelling, data-driven loan application, you position yourself as a knowledgeable and fundable entrepreneur. Treat the FDD as more than a formality—it’s your roadmap to franchise and financial success.