SBA Announces Valentine’s Day Changes to SBA Loan Program for Franchises

SBA Announces Valentine’s Day Changes to SBA Loan Program for Franchises

Yesterday afternoon, the U.S. Small Business Administration (SBA) announced temporary changes to the recently revised franchise review process for its 7(a) and 504 loan programs. The changes are intended to facilitate SBA loans for franchisees of franchise systems who have previously been on the SBA’s Franchise Registry or otherwise negotiated an SBA Addendum to their franchise agreements.

Last month, the SBA adopted a new SBA Addendum to Franchise Agreement for use in all franchise arrangements (the New SBA Addendum), replacing the individual SBA Negotiated Addenda that many franchisors had been using in the past. The idea was to simplify the SBA loan approval process for all franchise systems. However, many franchisors who had already negotiated an Addendum with the SBA objected to provisions of the New SBA Addendum and refused to sign it. Because the SBA refused to accept any previously negotiated addenda, franchisees of these systems lost the ability to obtain SBA financing.

Last week, the White House stepped in. On Friday, a draft policy change was circulated that would allow franchisors who had previously negotiated an SBA Addendum to continue using the negotiated addendum. The draft was reviewed over the weekend, with input from franchisors and selected attorneys representing franchisors, and the SBA’s new policy was revised yesterday afternoon. Under the revised policy, if a franchisor can certify that (i) the SBA had previously reviewed its 2015 or 2016 franchise agreement, including an SBA Negotiated Addendum, and determined that the franchise agreement, together with the SBA Negotiated Addendum, did not create an affiliate relationship between the franchisee and franchisor, and (ii) the terms of the loan applicant’s franchise agreement have not changed from those of the 2015 or 2016 franchise agreement, then the SBA will accept the previously negotiated addendum in lieu of the new one.

This change is an important one for franchise systems that previously negotiated an SBA Addendum, whether through the Franchise Registry or otherwise. So long as those franchisors do not change provisions of their franchise agreement that affect the SBA’s affiliation determination, they will now have the option of signing their previously negotiated addendum or the New SBA Addendum, whichever they find more acceptable. Those franchisors should enlist the aid of counsel in advising them which of the two addenda are more beneficial to them. It is also important that franchisors who have previously relied on SBA loans be cognizant of this option when making modifications to their standard form franchise agreements so as not to make changes that would impair their ability to use any previously negotiated addendum.

Click here to see the full text of the announcement.