SBA Loan Red Tape Will Be Reduced for Franchisees Investing in Listed Franchisors
The Small Business Administration will resurrect its Franchise Directory on June 1, a move welcomed by the International Franchise Association. As a go-to resource for information about franchisors, the Franchise Directory had two primary benefits: 1) It reduced the amount of paperwork that lenders needed to review for loans, and 2) it served as a powerful tool for lenders to use in assessing whether to approve loans. The Franchise Directory launched in 2018 and was discontinued in 2023.
In a Franchise Times article about the directory, Edith Wiseman, president of the FRANdata franchise research firm, noted that once a franchisor submitted qualifying documentation and then received approval to be listed in the directory, franchisees could be fast-tracked on their loan applications. “The banks then didn’t need to worry about vetting eligibility,” Wiseman explained.
In a Monday news release, Michael Layman, chief advocacy officer of the IFA, praised the return of the Franchise Directory. “As a centralized and verified location for lenders to check a franchise’s eligibility for SBA financing, the Franchise Directory was a key tool for lenders to efficiently process franchisee loan applications,” Layman said. “Its elimination disrupted the development of franchised businesses, causing lenders to pull back from franchise lending, denying would-be entrepreneurs access to critical sources of start-up capital.”
Franchise Directory Content
The IFA news release stated that “the reintroduction of the SBA Franchise Directory is part of a larger effort to streamline loan processing while maintaining appropriate oversight.” The IFA news release gave the following details about the upcoming Franchise Directory:
- Franchisors will be listed free of charge as they were in the former directory.
- Any franchisor must be listed in the directory in order for its franchisees to qualify for SBA loans.
- The new directory will replace the SBA Addendum (Form 2462 or negotiated addendum) with a certification signed by the franchisor acknowledging the conditions required to be listed on the directory. Many of these conditions are the same as those of the previous Franchise Directory.
- Franchisors that were previously listed in the directory may sign the certification within a specified period to be reinstated.
- Franchisors not included in the previous directory must apply to the SBA and meet its eligibility criteria to qualify for listing.
SBA Lending
Franchise lending accounts for more than 20% of the SBA portfolio, according to Wiseman. “I have crunched the numbers personally,” she said. In a March 21 article, LendingTree called the SBA’s 7(a) loan program its “flagship product for general financing” and noted that “franchise owners can use this loan for purchasing real estate, fixed assets, working capital and even refinancing existing debts. With amounts available up to $5 million, business owners can use it as a loan to start a franchise and cover initial startup costs.”
In that article, LendingTree also pointed out that the interest rates on SBA loans vary with the prime rate but are capped. At that time, the prime rate was 7.50%, which set variable-interest-rate loans between 10.5% and 14%; fixed-rate loans ran 12.5% to 15.5%. For more information about SBA lending, click here.
About the IFA
The International Franchise Association, the world’s largest franchising organization, advocates globally on behalf of the franchise business model through lobbying at all levels of government, public relations and educational outreach. According to IFA statistics, the United States currently has about 830,000 franchise establishments – with an expected increase to 851,000 by the end of this year. Franchising supports nearly 8.8 million direct jobs in the U.S. and produces $896.9 billion in economic output (the sum of franchising’s products and services), amounting to almost 3% of the nation’s Gross Domestic Product, or GDP.
