One of our clients recently attended a conference where the Fresno Loan Servicing Center gave a presentation on the common reasons SBA denies a purchase or repair of an SBA loan. Knowing that I’ve been snowbound, he figured I needed some reading material, so he sent along the presentation.
He was right. I’d been sitting around waiting for the snowplow to clear my road, so it was a dandy time to read the presentation. Okay, so the presentation is about why SBA denies its guaranty. But I didn’t get very far when I saw that one of the reasons at the top of the list is Ineligible Franchise Agreements.
What the hey? How can that be? SBA maintains an online Franchise Directory that lists all franchises and other brands eligible for SBA financial assistance. All a body has to do is search for a franchise on the Directory. How tough is that? Checking the list isn’t so tough. But it’s not enough. Here are just some of the challenges involved:
Let’s say there’s a company called Wendy’s Widget World. It seems like a neighborhood business, but you must consider all the brands of widgets Wendy sells. And for each brand, she may, or may not, have a branded sales agreement. SBA requires a branded sales agreement to be reviewed for eligibility just like a franchise agreement. Each brand needs to be on the list. If a brand isn’t listed and the loan goes bad, SBA may repair or deny the guaranty.
Then there are brands that were eligible only for Payment Protection Program loans, and were listed just for the duration of the program. When the PPP expired, so did the eligibility. And what about franchises where only part of the business is eligible? And then some brands aren’t eligible if BP previously owned the real estate. Or maybe your prospect’s hotel is on the eligible list, but it has a management agreement in place that you need to review for affiliation purposes. Don’t wait for the loan to go bad to have SBA tell you that the agreement made the loan ineligible.
JRB Recommends. Regardless of the list, protect yourself by reviewing a copy of the franchise agreement. If the date on your agreement precedes the date the list says the agreement was approved, you do not have an approved agreement. Right now, I’m reviewing a franchise agreement that says it expires in 2015 unless the franchisor extends it. The SBA application will be dated in 2023. Hopefully my client the lender has an extension of the franchise agreement. Or well, no loan.
Here comes the snowplow. I’ll soon be able to get on the road again. Too bad, because there’s much more. I haven’t even addressed the issue of a business that isn’t on the list yet the lender made the loan anyway. But what the hey? Already you can see a myriad of potential reasons for SBA denying or repairing the purchase of a loan.
Richard Jeffrey
Senior Associate
Head Underwriter
richard@jrbrunoassoc.com
www.jrbrunoassoc.com