SBA decides to eliminate its Franchise Directory
The Small Business Act, 15 U.S.C. § 632(a)(1), mandates that the U.S. Small Business Administration (SBA) makes its business loan programs available only to independently owned and operated small businesses. To determine whether an SBA loan applicant is an independent small business, the SBA must analyze whether there are any other parties with which the loan applicant may be affiliated who may exert control over the loan applicant. Under the current SBA rule, if a franchisor’s control is excessive, the prospective franchisee ceases to be independent, and the affiliation policy must be applied to verify the loan applicant is an independent small business. In franchise loan applications, the SBA must review the franchise agreement and other related agreements to identify provisions where control by the franchisor could render the applicant dependent on the franchisor.
Historically, the SBA published a Franchise Directory (Directory) which contains all franchise and other brands eligible for SBA financial assistance. The Directory only includes business models that are reviewed and found eligible under SBA's affiliation rules and other eligibility criteria. If an applicant's brand meets the Federal Trade Commission (FTC) definition of a franchise, it must be in the Directory in order to obtain SBA financing.
On October 26, 2022, the SBA published proposed amendments to various Federal regulations governing the SBA's 7(a) Loan Program and 504 Loan Program, including use of proceeds for partial changes of ownership, lending criteria, loan conditions, reconsiderations, and affiliation standards, to expand access to capital to small businesses and drive economic recovery.
As part of the SBA’s proposed amendments, it proposed to eliminate the Directory and requested public comments regarding the elimination of the Directory on or before December 27, 2022. After nearly six months and the receipt of approximately 54 public comments, on April 10, 2023, the SBA published a Final Rule eliminating its Directory. The Final Rule takes effect 30 days after publication, so the Final Rule will be effective on May 11, 2023.
The SBA published certain comments regarding the elimination of the Directory, including:
“These revisions remove the principle of control of one entity over another from consideration of affiliation; therefore, the mere fact that an applicant may be a franchisee is not in itself a reason that would render the applicant ineligible for an SBA loan, and thus there is no longer a compelling reason to maintain the SBA Franchise Directory.”
The SBA is removing provisions on affiliation arising from management and control, franchise or license agreements, and identity of interest to streamline affiliation determinations based on ownership. This also entails removing the principle of control of one entity over another from affiliation considerations. SBA lenders will still be required to examine franchised businesses for affiliation based on ownership, but neither the SBA nor the lender will review the applicant for affiliation with other entities beyond ownership.