Lenders May Be Reluctant to OK Loans to Franchisees, According to IFA
An International Franchise Association spokesman on Wednesday expressed worry that lenders will hesitate to greenlight loans for franchises now that the Small Business Administration is ending its Franchise Directory. Several months ago, the SBA had indicated it was likely to eliminate the directory, and it made the decision official to do so on Monday. The effective date for the directory’s demise will be May 11.
Established in 2018, the SBA Directory was designed to help lenders quickly and easily determine whether a franchise is eligible for SBA loans. The SBA Directory also has served as a tool for potential franchisees as they research a brand’s reputation.
Michael Layman, IFA senior vice president for government relations and public affairs, said in a statement released Wednesday that “while IFA appreciates the SBA’s efforts to streamline its lending programs and its engagement of the franchise community through this process, we remain concerned that elimination of the franchise directory will cause some lenders to pull back from franchise lending. SBA loans are a critical source of start-up capital for franchisees, as about 20% of SBA lending goes to franchising.”
Once the SBA Franchise Directory disappears, “it is imperative that lenders participating in SBA programs understand the change in determining affiliation and do not reduce their lending to franchisees,” Layman said. He added that continued lending is particularly important for entrepreneurs who wish to invest in “small and emerging brands.” Layman pledged that the “IFA will not stop working to ensure prospective entrepreneurs have the access to capital they need so franchising can continue to generate opportunities in communities around the nation.”
Layman also pointed out the franchise industry’s significance within the U.S. economy, saying that “franchising has been a principal driver of the post-pandemic economic recovery with nearly 800,000 locally owned businesses, employing 8.4 million individuals.”
Impact on Lenders, Potential Franchisees
As is required for SBA rules changes such as dropping the directory, the agency had a period for people and organizations to submit comments. The assessments in the submitted comments were mixed, although financial institutions seemed to favor keeping the directory because it represented a shortcut for them in terms of vetting franchises’ strength. Once the directory is gone, they will have to deploy personnel to do their own due diligence. Franchisee candidates will face a similar burden and can no longer lean on the SBA Franchise Directory when investigating a brand.
In the absence of the SBA Franchise Directory, one source for reliable information is FRANdata’s Franchise Registry. FRANdata is a respected franchise industry research partner of the IFA. The Washington, D.C.-based IFA, a global trade association, is the largest membership organization for franchisors, franchisees and franchise suppliers. Founded in 1960, the IFA lobbies government officials and lawmakers at all levels – local, state and national – in its role as an industry advocate.