"I Trusted YouTuber Ads and Started My Business... But Lost My Store" The Outcry of a Franchise Owner [The Trap of Small Capital Startups] ①

Store Owners Claim to Be Buried in Debt
Headquarters Accused of Pushing Excessive Loans
in the Name of Encouraging Business Conversion
Headquarters Responds: "We Only Helped Provide Startup Opportunities... No Middleman Profit"

Editor's NoteStarting a franchise business in South Korea often begins with taking on debt. Self-employed individuals fall into the trap of aggressive loan solicitations, lured by the promise of "low-capital startups" from franchises eager to expand their networks. Even when sales are made, franchisees who start with loans find it difficult to realize any actual profit. If business slows even slightly, the structure leaves them unable to endure, often leading to bankruptcy. This article examines how self-employed business owners are enticed by the bait of "low-capital startups" during the franchise process, and how excessive loans can result in dangerous consequences.

Mr. Lim, who once ran a chicken franchise store, switched to an all-you-can-eat barbecue restaurant and ended up buried in debt. The loan benefits offered by the franchise headquarters to persuade him to change his business model quickly snowballed into overwhelming debt within just one year.

On September 16, I met with four franchise store owners who claimed to have suffered damages from excessive loan solicitations by the headquarters of Franchise A and listened to their stories. The common benefit offered by Franchise A when signing franchise contracts with these victims was "loans." The promise to support everything from loans to marketing so that even low-capital entrepreneurs could make a profit ultimately came back to haunt small business owners as relentless debt collection notices.

"They promised a 20% monthly profit margin, but all I have left is billions of won in debt."

Mr. Lim said that Franchise A assured him that as long as he could secure the deposit for the new barbecue restaurant, they would handle everything else. Mr. Lim explained, "Once I managed to get the deposit and signed the lease, the headquarters told me I had to take out loans for interior construction, alcohol purchases, and rent or lease kitchen equipment and ovens," adding, "I should have stopped then, but after I paid the 10 million won down payment for the interior, the cycle of debt began."

Mr. Lim fell into a debt trap while preparing over 300 million won for the interior costs demanded by the headquarters. When he said he could not get a loan due to his low credit score, the headquarters referred him to IBK Savings Bank and even offered to provide a "joint guarantee," enabling him to borrow 350 million won. The terms required him to repay 10 million won per month for three years at an annual interest rate of 9.5%. Mr. Lim said, "The headquarters told me it would be possible, considering a 20% monthly profit margin, so I believed them."

Franchise store owners who suffered damage due to excessive loan solicitations from the franchise headquarters are being interviewed by Asia Economy at an office in Seoul. Photo by Jo Yongjun

Mr. Lim claims that the headquarters encouraged him to sign rental and lease contracts for new kitchen equipment, requiring monthly payments. The oven was contracted for four years at 933,000 won per month, and the kitchen equipment for three years at 2.34 million won per month. Considering the contract periods, the total costs amounted to about 44.7 million won for the oven and about 84.2 million won for the kitchen equipment. On top of this, after taking out a 50 million won loan for alcohol purchases, Mr. Lim found himself with over 500 million won to repay within five years.

More than a year after starting the business, sales still did not meet expectations. Mr. Lim’s barbecue franchise, started with borrowed money, continued to operate at a loss. Eventually, when he could no longer repay the loans, he filed for personal bankruptcy.

A representative of Franchise A stated, "We only operated the 'subrogation agreement system' to help prospective franchisees with insufficient startup funds, including those with low credit scores, to have a chance at entrepreneurship," adding, "Franchisees took out loans directly from savings banks, and the headquarters did not profit in any way as an intermediary."

The subrogation agreement system is a system in which the headquarters repays the franchisee’s loan debt if the franchisee loses the benefit of the loan term. However, if the franchisee has unpaid amounts such as meat payments, the headquarters may refuse to make the payment on their behalf.

The Franchise A representative also said, "There were no unfair contracts regarding interior construction, and in many cases, the headquarters actually paid additional construction costs that franchisees failed to pay," adding, "To maintain the creditworthiness of the franchise and the relationship with franchisees, the headquarters sometimes proactively repaid loan principal and interest to prevent loss of loan term benefits."

"I trusted YouTuber ads and ran the business... but lost my store"

'Since I'm a big eater, all-you-can-eat wasn't really my thing, but I was invited (laughs)' (A YouTuber's video enjoying a meal at the restaurant)

Mr. Kim, in his 40s, who ran the same type of barbecue restaurant as Mr. Lim, said the decisive reason he signed a contract with Franchise A was an advertisement featuring a famous YouTuber. He was intrigued by the claim that all-you-can-eat was a recession-proof item and believed the advertisement that promised a 20% net profit if monthly sales reached 100 million won. The startup cost listed on the headquarters website was 187 million won for a 165-square-meter store. By simple calculation, that’s about 3.74 million won per square meter, which seemed reasonable. In fact, the headquarters said they could provide up to 500 million won in startup loans.

Having previously run a barbecue restaurant, Mr. Kim was confident. In the first month, sales reached 120 million won. However, sales dropped by 20 million won each month, eventually plummeting to 40 million won. Facing difficulties, Mr. Kim even sold his car to pay his part-time workers. Still, he tried to hang on, but the 310 million won he borrowed for interior costs became a burden. He could not afford the 9 million won monthly repayments.

Franchise store owners who suffered damage due to excessive loan solicitation by the franchise headquarters are being interviewed by Asia Economy at an office in Seoul. Photo by Jo Yongjun

When Mr. Kim explained his difficulties to the headquarters, they suggested he become a "salaried manager." Mr. Kim said, "The losses weren't just 1 or 2 million won-they were tens of millions, so it was impossible to keep going," adding, "The headquarters offered to repay the interior loan if I handed over the store and suggested I work as a salaried manager at a new location."

Mr. Kim said he handed over the store, believing the headquarters would repay the 300 million won interior loan. He signed a contract, thinking that receiving a salary would stabilize his life again. His restaurant reopened as a directly operated store. However, Mr. Kim claims the headquarters is not currently repaying the interior loan. He said, "If there was no agreement between the headquarters and the savings bank, I wonder how self-employed people like us, with low credit scores and no collateral, could have received 300 million won in loans," adding that he is considering a civil lawsuit.

A representative of the headquarters explained, "Franchise profitability can vary greatly depending on the operator’s involvement in store management, sales volume, operational efficiency, and fixed costs (such as rent and labor)," adding, "Differences in profitability are due to the franchisee’s management and abilities, and this is the same for all franchises."

"Living in a rented room because of debt... Headquarters is out of reach"

Since May this year, Mr. Park has been running a Korean beef barbecue restaurant under contract with Franchise A, but has not been able to escape operating at a loss each month. Within four months, sales dropped to one-third of the first month’s level. Franchise A, which operates the all-you-can-eat barbecue restaurant brand previously run by Mr. Lim and Mr. Kim, launched this new brand.

Mr. Park said, "The headquarters claimed to have a 6,600-square-meter logistics center and a meat processing plant," adding, "When I felt the meat quality was poor, I requested to see the logistics center and processing plant in person, but the headquarters did not respond." Mr. Park also said that since opening the store, contact and visits from the headquarters have become infrequent.

A franchise owner who suffered damage due to excessive loan solicitation by the franchise headquarters is explaining the situation in an interview with Asia Economy at an office in Seoul. Photo by Jo Yongjun

Mr. Park said he saw other new franchise owners who took out loans of hundreds of millions of won but became credit delinquents because their businesses failed, stating, "There are so many people who have been ruined now." He added, "Some owners even took out loans using their mother’s house as collateral, but are now unable to pay the interest and are on the verge of having their stores auctioned off. Others have gotten divorced because of debt and are living in rented rooms for 200,000 won a month. The headquarters rarely answers calls from these franchisees."