SBA Wants to End the Franchise Directory – What That Means for Lending

In late October, the U.S. Small Business Association (SBA) proposed a few rule changes to amend several of the existing regulations that make up the SBA 7(a) Loan Program and 504 Loan Program – two very popular avenues that franchise candidates use to secure funding. These same amendments would apply to several additional loan vehicles routed through the SBA as well. At the time of this writing, the SBA has an open period in which comments can be solicited regarding these proposed rule changes – and they must be received by Dec. 27, 2022.


Details of the SBA’s Proposed Amendments

So, what exactly do the new amendments mean in layman’s terms? How should existing – and future – franchise ownership candidates prepare for these funding updates and potential changes? To provide perspective, we turn to one of FranNet’s most respected industry partners, FRANdata.

What is the Proposed Amendment?

What the SBA has proposed is a way to streamline the eligibility process for franchisors and distributorships/licensees, by basing the determining factors of their identities on a different set of ownership criteria than the current SBA Registry. If the amendments are accepted, it could do away with the Franchise Directory in favor of a case-by-case review for all loan requirements and lending decisions going forward.

What Benefit Would This Bring?

These amendments are under consideration to accelerate the process and accessibility of lending requirements, much the same way that similar identifiers were waived for the popular PPP loan programs during the pandemic. Ultimately, it would speed up the approval process, as well as elicit more eligibility and participation from a greater number of brands interested in SBA financing.

What are the Potential Drawbacks?

Critics say that the SBA is basically shifting the responsibility of properly identifying a qualified franchise or distributorship licensing opportunity from themselves over to the lenders. But skeptics wonder if this is advisable, considering that the SBA has much more familiarity with franchising programs in general – after all, they operate the Franchise Registry, a list of franchises that have been deemed eligible for financing because they’ve met all lending requirements.

Another key issue is the similarity of names between brands and distributorships. With over 4,000 such entities in the current marketplace, critics feel that banks and lending institutions will have a harder time with mischaracterizations of brands and their eligibility for funding. Lastly, under the proposed amendments, it’s the lenders who would pick up the responsibility for reviewing agreements in conjunction with other rules that could put the SBA guarantee itself at risk. For years, the SBA Franchise Directory was the stamp of approval for all lenders that SBA rules and requirements were being followed. If this doesn’t work as intended, it could eventually lessen lender confidence.

Ostensibly, this is about relieving pressure on the SBA, which can get bogged down by maintaining its internal database of eligible franchisors. But many legal experts favor allowing franchisors and lending institutions the power to “self-police” their own eligibility after they’ve been certified as legitimate for financing by the SBA – a process that’s been in place since 2018.

This is an ongoing issue – one that FranNet will be monitoring for our benefit, as well as yours. We hope to have another update for you early in 2023 as to the future of the SBA Franchise Directory and loan eligibility requirements.

Speak With a FranNet Consultant to Learn More!

FranNet is standing by to help you navigate your own personal entrepreneurial journey. Getting started is simple and involves setting up a no-cost, no-obligation appointment with one of our qualified FranNet representatives. Not yet sure what type of business you were meant to own? That’s fine, too – you simply need to reach out and speak with one of our qualified franchise experts today! Together, we can find a business opportunity that aligns with your lifestyle and income-oriented goals.

Dec 16, 2022