New SBA Rule Upends Franchise Lending in December Surprise
After waiting for months for new rules from the U.S. Small Business Administration, lenders and franchisors just received them in a surprise notice—and they’re upending the usually routine business of making government-backed loans to franchisees.
The new rules, set to go into effect January 1, will discontinue the use of the Franchise Registry as a one-stop location where franchisors can certify that their franchisees are eligible for SBA loans.
Instead, franchisors would have to sign one SBA-issued standard agreement applying to every franchisee they sign up—something many franchisors will refuse to do, sources say; or negotiate and gain approval for each contract separately in a time-consuming exercise.
Meanwhile, lenders who want to make government-backed loans would have to certify themselves that a borrower is eligible for an SBA loan—and forego the government guarantee to reimburse them if the loan goes bad and the SBA determines the borrower wasn’t eligible after all.
The SBA says the purpose of the revisions, called the SOP 50 10 5(I), is to “streamline the procedures” for determining whether a business qualifies as “small” and thus whether it’s eligible for a government-backed small-business loan.
That can be tricky when talking about franchised businesses. A big issue is affiliation—that is, is the small business affiliated with a larger entity (such as a franchisor) that imposes rules that impinge on the individual operator’s independence.
Under current rules, franchisors can gain approval from the SBA and post their agreements once on the Franchise Registry, and then all other contracts that use the same language are approved as well.
“Now that list is going to be gone. And now we have to start over from scratch,” said Nick Jellum, president of Anastasi Jellum, a specialty law firm representing SBA lenders around the country.
He had heard about the changes at a recent NAGGL meeting, where lenders of government-guaranteed loans gather each year, but was waiting to see the actual order when issued. “It’s exactly what I thought it would be and it’s bad,” he said in an interview today.
Edith Wiseman is president of FranDATA, the franchise information and research firm that operates the Franchise Registry. The day after the guidelines were issued, she was hearing from franchisors who said they didn’t like the “take it or leave it” aspect of the new rule. “Word for word from a franchisor,” she said, was “we will end our use of SBA lending.” She expects others will likely feel differently.
“I think it will be a mixed bag. Some franchisors will think, ‘I’ll just sign it, it’s easy.’ And others will have a problem with it because it is inflexible.”
She thinks the complexity could dampen SBA lending to franchisees, which FranDATA estimates represents between 17 and 22 percent of all SBA new loan volume. “We are going to be going back to 1999, which is what was happening before the Franchise Registry existed, which is lenders are going to be negotiating one-off with franchisors,” she said. “What a shame and a waste of time, and not serving the cause of making small-business loans.”
Wiseman said the loss of business from shelving the current Franchise Registry program is negligible for her firm. “It has no meaningful impact to us because the Franchise Registry is a collection of services useful both to lenders and to franchisors,” she said.
She said outside of the NAGGL meeting, few people had been aware of the SBA’s plans. “Franchisors had never seen this before, which was kind of a shock.” She said the SBA rushed out the rule “absolutely” because of the Trump administration coming in, which could “completely change” practices at the SBA. The president appoints the head of the SBA, who then sets his or her own agenda.