 | Tip of the Week Why Franchise Lending Makes Sense - Now, More Than Ever Lenders are tightening their credit belts. Even with the SBA guaranty, lenders are shying away from deals in this economic climate that they used to finance more readily. We hear every day that lenders are no longer interested in certain industries (restaurants) or start up ventures because of the higher associated risk. But, along with the SBA guaranty, there are still ways to mitigate risk that makes sense, such as banking the value that a strong franchise concept can bring to the table. Franchised businesses can mitigate many of the routine start up risks because they have tested and tried their system and proven it to work successfully. Everything from high level marketing to mundane administrative tasks are typically understood and clarified for the benefit of the franchisee and ultimately to their lender. Many good franchises help the new franchisee with the headaches of identifying the right location, negotiating leases, purchasing the right equipment for the right price and identifying reliable suppliers and much more. Proven experience can be worth its weight in gold, especially in these uncertain economic times. We are hearing that many PLP lenders shy away from a franchised operation if they are not listed on SBA’s franchise registry (www.franchiseregistry.com) because they don’t want to jump through the hoops required to make the eligibility decision delegated to them. However, we encourage lenders to not abandon good deals just because the SBA “noise” seems too great. When the franchisor is not listed on the registry, there are places to go for direction and help with interpreting SBA’s requirements and determining franchise eligibility: -
Reread SOP 50 10 (5), pages 91-95. The primary concern of SBA is that the applicant (the franchisee) must meet the size standards; therefore, it is necessary for the lender to determine whether the franchisor and the franchisee are affiliated. If they are, the chances are very good that the franchisee (borrower) would not be defined as a “small” business and, therefore, ineligible. SBA delegates eligibility determination authority to PLP and SBA Express lenders; however, the lender may still pose questions directly to SBA at franchise@sba.gov.
- Base SOP interpretations on 13 CFR 121.103(g). Again, determination of affiliation is the primary focus of the actual regulation, which states that the franchisee must have the right to profit from its efforts and bears the risk of loss commensurate with ownership of the business. SBA is rightly concerned that the franchisor does not exert undue control or influence on the franchisee to the point where fundamental eligibility could be at question based on possible affiliation and size.
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Use the franchisor Uniform Offering Circular and the franchise agreement to determine the relationship between the franchisor and the franchisee. Remember, the new SOP 5010 (5) applies the same requirements imposed on franchise agreement to license agreements, dealer agreements, jobber and similar agreements. Research and appropriate interpretation of the rules is an important first step. This must be followed by clear, thoughtful written documentation in the loan file to support the decision.
These are some of the fundamental steps involved in Franchise lending. Many of our clients like these types of deals because they lend themselves well to a systemized, consistent approach by the borrower. Prudent policies and procedures account for the approach and the steps required to manage this lending niche profitably and soundly. At sbaAccess, we work with lenders on franchise concepts frequently – from helping you refine your approach to qualifying for eligibility and credit considerations to case by case reviews for franchise eligibility. We can assist on a project basis or on a month to month, Lifeline basis. For more information please feel free to contact us. Now is the time to schedule a complimentary consultation to determine if we are a good fit for your specific needs. Take the right approach Karen McHugh and Brian Burke | |
