Most franchised businesses are small businesses, by some definition. Financing a small business has always been a difficult proposition, particularly a start-up small business. And that has never been more true than today, when frozen credit markets, uncertain loan standards and skittish loan officers have made it virtually impossible for a small business to obtain credit.
In the past, the U.S. Small Business Administration (“SBA”) has been able to lend assistance in this area. The SBA guaranties qualified loans from approved lenders, making it easier for banks to extend credit to certain franchisees. The SBA has actively engaged itself in the franchising industry with the creation of The SBA Franchise Registry. The Franchise Registry, found at a website managed by FRANdata, describes itself as “a national online listing of franchise systems whose franchisees receive expedited loan process when applying for financial assistance from the U.S. Small Business Administration (SBA).” The SBA preapproves the franchise agreement and, effectively, the franchise system. The website observes that membership on the Registry is not a prerequisite for obtaining an SBA loan, but then it notes that some SBA lenders will not process a loan for a franchise system that is not represented on the Registry.
The SBA requirements that have developed over the years as being necessary for a system to obtain qualification have frequently been a source of controversy. Recent posts on the Listserv for the ABA Forum on Franchising have discussed an SBA requirement that the SBA will not approve a loan in a system where franchisees are subject to Electronic Funds Transfers (EFT) by the franchisor, because this does not leave the franchisee with sufficient control over its own business to qualify as an independent small business. Naturally, this has given rise to cries of outrage from franchisor counsel that preventing the use of EFT and similar electronic/internet monitoring devices strips the franchisor of necessary protections that are commonly used in this day and age.
A recent email to the ListServ from the IFA commented on that organization’s lobbying efforts to gain recognition in Washington that the SBA loan guarantee is frequently the only way a fledgling franchise can obtain financing. The IFA and other franchisor advocates have argued that the rules relating to the loan guarantee programs need to be updated and improved to take into account frozen lending markets and rapidly developing tools being used within franchise systems, tools which sometimes blur the line between control and independence.
If you are a franchisor interested in facilitating credit for your franchisees, we suggest you look into the SBA program, at the website noted above. If you are a potential franchisee, we suggest you go to the actual Franchise Registry and see if the system you are interested in is represented there.
We will keep abreast of developments in this area and provide further advice down the road.