Technical corrections to SOP 50 10 7 are coming. I promise. Now, I don’t expect any earth shattering announcements like the return of the Franchise Directory or Form 1971. Well, “You don’t know what you’ve got ’til it’s gone.”1 Remember that line? Anyhow, I’m positive technical corrections in the updated SOP will clarify the issues we’re all debating. A close read of the SOP might help.

Guaranteed: The Franchise Directory is gone. Directory or not, Franchise lending has always been a “sticky wicket,” fraught with technicalities. Here are some issues to consider when lending to a  franchise:

  • SBA has consistently required that a small business applicant be “independently owned and operated” (13 CFR § 121.301; SOP 50 10 7 page 16). Yet some franchise agreements do not allow a franchisee to do its own hiring, or to have its own bank account. We don’t need a Franchise Directory to tell us that such a provision is contrary to being independently operated.
  • If the real estate where the franchise is located is leased, and will be the collateral for the loan, review the lease agreement to make sure you can obtain the appropriate lien position.
  • And if the business seems to cater to one gender rather than another, make sure the facility is open to all and can accommodate everyone.

In addition, the SOP suggests that lenders consider any credit information such as the number of failed franchisees and cash flow projections provided by the franchisor. These and other issues are credit matters and not eligibility issues. They are probably disclosed in the aptly named  Franchise Disclosure Document. No Franchise Directory would have included that data. The FDD would also likely state how often property improvements must be made, and that the cost should be included in a reserve for that expense. Again, this is a credit matter and not an eligibility matter.

Despite my reassurances, if you still don’t feel confident handling a franchise loan application, give us a call. As always, we’re here to assist. Contact JRB.

Richard Jeffrey
Senior Associate, CDC/504 Program

1  “Don’t it always seem to go … That you don’t know what you’ve got ‘til it’s gone? … They paved paradise and put up a parking lot.” Joni Mitchell’s classic environmental song, Big Yellow Taxi, 1970.

You Don’t Know What You Got (’Til It’s Gone): song by glam metal band Cinderella’s lead singer, Tom Keifer, 1988.