Positive Changes For SBA Franchise Investors
The SBA has issued Standard Operating Procedure 50 10 5(J), which became effective January 1st. This rule stipulates that franchisors who want to assist their franchisees qualify for loans backed by the SBA must be listed on the SBA’s new “Franchise Directory.”
The change means that lenders and CDCs will no longer need to review franchise or other brand documentation for affiliation or eligibility.
The SBA Franchise Directory
SBA created the SBA Franchise Directory of all franchise and other brands reviewed by SBA that are eligible for SBA financial assistance. The Directory will only include business models that SBA deems eligible under SBA’s affiliation rules and other eligibility criteria.
If the applicant’s brand meets the FTC’s definition of a “franchise,” it must be on the Directory to obtain SBA financing. Lenders will be able to use the Directory and again will no longer need to review franchise or other brand documentation for affiliation or eligibility.
The new SBA Franchise Directory is the agency’s effort to streamline loan processing for franchisees and replaces the previous Franchise Registry. The new Directory lists the following information for each franchise brand that meets the FTC Rule’s definition:
· The franchise brand’s SBA Franchise Identifier Code;
· Whether the franchisee is required to sign an addendum to the franchisor’s Franchise Agreement and whether it’s the SBA’s standard addendum (SBA Form 2462) or a negotiated addendum; and
· Any additional questions a lender should examine in reviewing loan applications from franchisees of the franchise brand.
The main purpose of the directory is to make lenders aware of the existence and viability of a franchise brand, however, prospective franchisees, government agencies, educational institutions and industry experts use the list to validate that a franchise is an existing and thriving company.
The SBA and Franchising
SBA-guaranteed small business loans have been a way for franchisees to fund the acquisition and development of new franchises for some time. The SBA guarantees conventional bank loans to independent small businesses.
However, a franchisee won’t qualify as a small business if the SBA determines that the franchisor has too much control over the franchisee. In that instance, the SBA will treat the franchisor and franchisee as “affiliates.” How does the SBA make this decision? They look at the
Franchise Agreement provisions and determine if there are provisions like those giving the franchisor a right of first refusal upon a franchisee change of ownership or a right to buy franchise assets upon termination of the Franchise Agreement.
The Registration Process
To add its brand to the Directory, franchisor must submit the agreement, Franchise Disclosure Document (FDD) if applicable, and all other documents the franchisor requires the franchisee to sign to the SBA. The agency will review these materials and make an affiliation and eligibility determination. When a franchisor agrees to use the SBA Addendum to Franchise Agreement (SBA Form 2462), the SBA will only conduct an eligibility review and won’t conduct an affiliation review.
Tips for Franchisors
Franchisors can help their franchisees secure SBA-backed financing by doing the following:
· Confirming the franchise brand is listed on the directory and that the information is accurate;
· Submit its Franchise Disclosure Document with all exhibits to the SBA to be added to the Franchise Directory; and
· Note that depending on whether a franchisor is willing to accept the SBA’s standard form of Addendum to Franchise Agreement (SBA Form 2464) or wants to negotiate its own addendum with the SBA, a franchisor will have additional requirements.
Some franchisors elect not to use the SBA’s standard form of Addendum to Franchise Agreement because the standard form of addendum uses imprecise terms, and many franchisors prefer to use their own Franchise Agreement addendum to avoid overbreadth issues with the SBA’s form.
Contact a Franchise Expert in Sacramento
Andrew is a business expert and has worked with franchisors and franchisees in cities throughout the Sacramento Region, like Citrus Heights, Rancho Cordova, Folsom, Elk Grove, Roseville, Rocklin, Davis, El Dorado Hills, and Cameron Park. Andrew can help you with deciding on an appropriate franchise, your location in Sacramento, competitive intelligence, financing, in addition to providing answers to all your questions.
Take the time to speak with Andrew about buying a franchise or determining how to franchise your business. Please visit our website for additional information on franchises. You can also get in touch with Andrew via email or call him at (916) 570-2674.