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SBA 504 Q&A: Financing Franchises

Jan 2022

Q: What does the Small Business Administration (SBA) require in relation to financing a franchise with a 504 loan?

A: Effective Jan. 1, 2018, the SBA launched their Franchise Directory. In short, the directory lists franchisors who have submitted their agreements to the SBA for review and comment and indicates what needs to be collected in order to fund the SBA portion of the loan.

Is the franchise/brand listed on the SBA Franchise Directory?

If so, please note the following regarding the directory:

Brand: the name listed as “brand” on the registry should exactly match the name of the franchisor, or brand, on the franchise agreement.

Meets FTC Definition?

• If yes, read on for any addendum requirements.
• If no, you may proceed with the loan as usual. These are listed to ensure Certified Development Companies are aware they have already been reviewed and determined to NOT be a franchise.

Is an Addendum Needed?

• If not, you may proceed, but will need to collect the fully executed franchise agreement, to provide to the SBA, via a change request, after authorization, but prior to debenture funding.
• If yes, the registry will indicate whether the SBA addendum (form 2462) is used or if the franchisor has negotiated their own addendum (SBA negotiated addendum), which they will need to provide.
  • The appropriate fully executed addendum will also need to be submitted to the SBA, via a change request, along with the franchise agreement as mentioned above, prior to debenture funding.
  • Of note: the SBA addendum, form 2462, can be used in place of a negotiated addendum as long as it is fully executed.
  • Signor’s on the franchise agreement much match the addendum and ultimately the loan authorization. This could mean an assignment is needed assigning the franchise agreement to the appropriate company/individual, as applicable.

Notes: this section indicates other items or issues to be aware of related to the specific listing.

If not, how is the brand submitted for review?

• The franchisor must submit the agreement, Franchise Disclosure Document (FDD), if applicable, all other documents the franchisor requires the franchisee to sign, and their contact information to franchise@sba.gov for an affiliation and eligibility determination.
• If the franchisor agrees to use SBA Form 2462, the SBA will only conduct an eligibility review, not affiliation, and this will speed up the approval process.
• If the franchisor elects not to use SBA Form 2462, the SBA will work with the franchisor to resolve any affiliation issues, which could include use of an SBA negotiated addendum.
  • When this option is elected, the applications will be reviewed in the order in which they were received.
• After review, and finalization of any needed addendums, the SBA will list the brand on the directory along with applicable information.

The main take away is a change request (form 327) will always be needed on “franchise” loans in order to submit the executed agreement, and addendum – if applicable, to the SBA for their concurrence to close and fund.

For more information about SBA 504 loans in Alabama, Florida or Georgia, contact a Florida First Capital Loan Officer or email us at info@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.