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December 13, 2017

Best Practices: Franchise Reviews under SOP 50 10 5(J)

by Jennifer Borra

Effective January 1, 2018, SBA issued new rules to further simplify the franchise affiliation review process in SOP 50 10 5 (J). Lenders will no longer need to review franchise documentation for affiliation or eligibility. SBA has created a new SBA Franchise Directory (“Directory”) that will be accessible at www.sba.gov/for-lenders, which will include pertinent information to Lenders contemplating SBA financing to a proposed franchisee.

As of the new year, the SBA Franchise Directory will indicate the following for each brand:

  • A SBA Franchise Identifier Code, which will be issued only if the agreement meets the FTC definition of a franchise;
  • Whether or not a brand meets the FTC definition of a franchise
  • Whether the SBA Form 2462 or an SBA Negotiated Addendum is applicable for each brand
  •  Whether there are other eligibility issues for Lenders to consider for a particular brand.

When processing loans under delegated or non-delegated authority Lenders/CDCs must document the file showing the brand is on the Directory and identify the franchise and SBA Franchise Identifier Code when entering the application in E-Tran or SBA One. If the brand is not on the Directory, delegated Lenders/PCLP CDC may make the determination of whether or not the agreement meets the FTC definition of a franchise, and SBA will review such determination at the time of guaranty purchase or during lender oversight reviews.

For those small business applicants operating under more than one brand, Lenders must confirm that all brands that are critical to the applicant’s business are listed on the Directory. Lenders must obtain copies of all executed franchise documentation, the SBA Form 2462 or SBA Negotiated Addendum, and any other agreements between the franchisor and applicant prior to initial loan disbursement.

When the small business applicant is a franchisor, SBA will review the franchise documentation and determine whether affiliation exists. SBA will then issue a global addendum on a case by case basis.

The Directory does not contain links to the SBA reviewed franchise agreement or Negotiated Addendum for a brand. Lenders may rely on the presence of the brand on the Directory and obtaining the SBA Form 2462 or SBA Negotiated Addendum from franchisor to process the loan. In order to remain on the Directory, franchisors that either do not need an addendum or those that use an SBA Negotiated Addendum, must provide an annual certification, SBA Form 2464, to SBA. The SBA Form 2463 will be discontinued beginning January 1, 2018.

All inquiries related to approval of franchise agreements and the Directory should be sent to franchise@sba.gov. For all franchise loans approved for the remainder of this calendar year, Lenders must continue to follow the current procedures outlined in SOP 50 10 5 (I). SBA has indicated technical corrections to SOP 50 10 5 (J) are in process. We will provide updates on any further changes or developments as they relate to the new franchise review process. For more information, please contact Jennifer at 267-470-1206 or at jborra@starfieldsmith.com.