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Log In / Register | Feb 21, 2018

Changes Ahead for SBA Franchise Loans

SBA logoFranchisees often seek access to funding for their businesses through SBA loans, but changes have been taking place over the last few years and more are in store for 2018. This blog by a legal firm is addressed to franchisors, but the information is just as important and arguably more important to franchisees, who are the debtors.

By way of background, franchisees seeking SBA-backed lending are at a disadvantage to other small businesses because of how the SBA views the “affiliation” between franchisors and franchisees. Certain provisions that are common in franchise agreements are viewed as overly restrictive on the franchisee’s right to independently reap a profit from its business and as creating an affiliation between franchisor and franchisee. The SBA then views the franchisor and franchisee as one economic entity, often disqualifying the franchisee from SBA-backed lending. The affiliation issue is typically overcome by amending the franchise agreement on the points that create “affiliation.”

For many years, to avoid the affiliation issue and to facilitate SBA-backed lending to its franchisees, franchisors went through an optional SBA registration process facilitated by a third-party vendor, FranData. That process included reviewing the franchise agreements, negotiating an addendum to waive any franchisor rights that would create affiliation, and registering the form of franchise agreement and addendum with the SBA. While not cheap, the process worked well with relatively quick turn-around times — until the past few years.

…On Oct. 13, 2017, the SBA announced the most recent change to its approval process. It appears to be a mix of the old, familiar registration system, with the new standard SBA addendum.

Read more about the changes taking place on the first day of the 2018 new year at Greensfelder Hemker & Gale PC, Lexology

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