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SBA Launches New Franchise Directory; Issues Key Revisions to Franchise Review Process

Oct 2017

The Small Business Administration (SBA) has issued Standard Operating Procedure (SOP) 50 10 5(J), which becomes effective on Jan. 1, 2018. Among other changes, the SBA has revised the review process for 504 loan applicants that are or will be operating under a franchise, license, dealer, jobber or similar agreement that meets the Federal Trade Commission (FTC) definition of a franchise.

Under these changes, SBA lending partners and Certified Development Companies (CDCs) will no longer have to review franchise or other brand documentation for affiliation or eligibility after Jan. 1, 2018.

For loans processed through Dec. 31, 2017, lending partners must continue to follow the franchise review procedures set forth in SOP 50 10 5(I) and SBA Policy Notice 5000-1941 (effective Feb. 14, 2017), and should contact franchise@sba.gov to obtain an SBA Franchise Identifier Code, if necessary.

The SBA has created and is posting a list, the SBA Franchise Directory (the “Directory”), on its website of all franchise and other brands reviewed by the SBA that are eligible for SBA financial assistance (see below).

The Directory includes only those brands that the SBA has determined are eligible under SBA affiliation rules and other eligibility criteria. If the applicant's brand meets the FTC definition of a franchise, it must be on the Directory in order to obtain SBA financing. (To help minimize confusion over brands that may appear to be franchises, but that do not meet the FTC definition, the SBA will include such brands on the Directory at their request if they are eligible in all other respects.)

The Directory will be maintained on SBA's website at www.sba.gov/for-lenders and will contain the following information:

• Whether the brand meets the FTC definition of a franchise;
• An SBA Franchise Identifier Code, if applicable (a code will only be issued if the agreement meets the FTC definition of a franchise);
• Whether an addendum to the franchise agreement is needed and, if so, whether the franchisor will use the SBA Addendum to Franchise Agreement (SBA Form 2462) or an SBA Negotiated Addendum (with respect to an SBA Negotiated Addendum, the Directory will list the addendum most recently negotiated with SBA, which will not be earlier than 2015); and
• Whether there are additional issues the SBA lending partner must consider with respect to the brand (e.g., documentation that the business will be open to all, review of any third-party management agreement to ensure the applicant is not a passive business or affiliated with the management company).

For businesses offering multiple brands, at least 51% of the revenue accountable to brands must be on the directory or cleared by the SBA. The CDC needs to list all brands, noting the ones that meet the 51% cleared on the directory.

Management agreements also will be added to the Directory as cleared. These agreements are commonly used in the hotel industry and businesses offering medical services.

Beginning Jan. 1, 2018, for applications involving a franchise or similar relationship, before submitting the application to SBA for non-delegated processing or approving the loan under delegated authority, SBA 504 lending partners and CDCs must check the Directory to determine if it includes the applicant's brand. (The SOP includes specific guidance for applicants that operate under multiple agreements.)

If the brand is on the Directory, the lending partner or CDC can proceed with processing the application. If the brand is not on the Directory, then the application cannot be processed. If the applicant's brand is not on the Directory, the SOP sets out the procedures a franchisor must follow to request that the SBA add its brand to the Directory.

Franchisors are encouraged to apply for the Directory now as the SBA has staffed up to handle the rush of processing before the changes go into effect Jan. 1. Franchisors will need to send their FDD document (if they have one), agreements and documents required to be executed by the franchisees to franchise@sba.gov.

Franchises now on the Directory have been cleared and CDCs can proceed with applications for those franchises without pre-application screening.

For more information about SBA 504 loans in Florida, South Alabama or South 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.