Effective January 1, 2017, the SBA has changed the rules for how SBA lenders finance franchise borrowers. Below are some frequently asked questions and corresponding answers:
What is the SBA’s rule change impacting franchise loans?
The SBA streamlined its franchise eligibility procedures. For franchise borrowers, the lender must: i) identify the franchise in the SBA’s system, and ii) obtain a copy of the ‘SBA Addendum to the Franchise Agreement’ (new 2-page form) signed by the franchisor and franchisee.
Does a franchise brand still need to submit its FDD and agreements for SBA’s review?
No, the SBA no longer reviews FDDs and franchise agreements, either directly or indirectly through FRANdata.
Are franchisors required to be on any SBA lists like the Franchise Registry?
No, the SBA eliminated the use of all lists, including the Franchise Registry, in determining SBA eligibility.
What does the ‘SBA Addendum to the Franchise Agreement’ say?
The Addendum, signed by the franchisee and franchisor, is with the understanding that the franchisee has the right to profit and bear the financial risk of its endeavor, a core tenet of SBA eligibility. The Addendum ensures the franchisor cannot exert a level of control over the franchisee that would create affiliation and thereby render the franchisee SBA ineligible.
Are there risks to franchisors in signing the SBA Addendum?
Perhaps, but it all depends on the franchise agreement. The Addendum supersedes conflicting terms in the Franchise Agreement. Therefore, if a franchisor signs the Addendum it is with the understanding that they will adhere to the language/terms in the Addendum rather than the franchise agreement. For instance, franchise agreements that give the brand the right to hire a franchisee’s employees, will lose that right by signing the Addendum, which provides that the “Franchisor will not directly control (hire, fire, schedule) a franchisee’s employees.”
Are there risks to franchisors in NOT signing the SBA Addendum?
Yes, the brand’s future growth may be impacted since no franchisees will be able to secure SBA financing if the brand does not sign the Addendum.
Do most franchisors intend to sign the SBA Addendum?
In a recent poll of franchisors who have already made a decision to sign/not sign the Addendum, 97% report their intent to sign it.
Does a franchise brand still need to pay to be on the Franchise Registry for franchisees to get an SBA loan?
No, a franchise brand is no longer required to be on the Franchise Registry in order for their franchisees to secure SBA financing.
Why did the SBA make this change?
SBA made this change to streamline the procedures for determining eligibility based on affiliation for franchised borrowers.
Where can I learn more about the rule change?
- Schedule a private consultation to discuss your brand’s unique needs
- SBA’s Notice 5000-1399
- BoeFly webinar recording
- Franchise Times article on the SBA Rule Change