As of January 1, 2018, the U.S. Small Business Administration (SBA) will begin implementing new rules that will affect franchisors, entrepreneurs wishing to join a franchise system, and lenders or CDCs (Certified Development Companies). Lenders who want to make SBA-backed loans will be responsible for certifying that a franchisee-borrower is eligible for an SBA loan.
The new rules call for the SBA to create and maintain a directory of approved franchisors eligible for government-backed loans for their franchisees. Franchisors whose franchisees apply for the government-backed business loans– specifically 7(a) and 504 loans to open franchises – will want to ensure their franchise system is registered with the SBA.
To obtain approval, franchisors will need to submit their Franchise Disclosure Documents, franchise agreements and other paperwork franchisors may require franchisees to sign.
Once a franchise system appears on the registry, lenders will know that franchisees of the franchisor will be eligible for SBA loans. In addition, franchisors may be eligible for automatic renewal in the directory each year, if the franchise documents have not substantially changed.).
Before January 2017, a private company called FRANdata maintained a similar registry, but the SBA banned use of that in favor of a more cumbersome process:
Franchisors had to provide blanket approvals for all franchise agreements they were going to sign with SBA funded franchisees, or negotiate and get approvals for individual franchisee agreements and use an SBA approved addendum every time an SBA borrower wanted to buy a franchise.
Those choices were either time-consuming or ill-fitting of circumstances.
SBA Approved Franchisors
The 2018 process seems to be more hybridized, incorporating the documents review system and the above-referenced SBA addendum, with a new registry system.
As mentioned, the approvals process to gain initial entry on the registry means submitting the FDD, agreements and other documentation provided to potential franchise buyers. The SBA reviews these to pre-approve for SBA financing – which doesn’t serve to endorse a system in any way, it just makes financing easier for qualified loan seekers.
The Franchise Directory will include those companies that have met all SBA criteria, some that meet the Federal Trade Commission’s definition of a franchise, and certain brands that do not meet the FTC definition but are otherwise eligible.