What should franchisors do to help their franchisees secure SBA-supported funding? Recently, the SBA revised its approach to franchise financing to tighten the franchise registry. The registry is an SBA program that lists the names of franchisees whose franchisees can benefit from an optimized verification process. Prior to the new SBA program, effective January 2017, the SBA had created an SBA registry in which the Agency reviewed a franchisor`s franchise agreement and disclosure documents to determine whether its franchisees had sufficient independence as business owners to qualify for a loan guaranteed by SBA. Earlier this week, the Senate passed coronavirus Aid, Relief, and Economic Security (CARES), which is worth nearly $2 trillion. This bill, known as Phase 3, is beneficial to many franchise systems and hospitality brands and contains generous and unprecedented provisions to provide liquidity to small businesses in order to keep their employees on the payroll. The House of Representatives passed the CARES Act on Friday, and the president signed the bill shortly thereafter. The claims provisions in franchise agreements generally relate to an agreed formula or a sum of money agreed upon by franchisors and franchisees (at the time the franchise agreement is signed) to determine the amount of harm the franchisor can claim if the franchisee violates the franchise agreement. Of course, in the event of a late payment of a franchise agreement, the SBA wishes to ensure that the eventual repayment of the guaranteed SBA loan is not compromised by excessive compensation from the franchisee by the franchisee. Accordingly, the SBA franchise agreement reviews the liquidated compensation provisions and requires that these provisions be “reasonable.” These provisions should only be triggered after a breach of the franchise agreement and, at the time of signing the franchise agreement, the nature and possible amount of the liquidated damage must be properly established. Small Business Administration`s “7 (a) loan program serves as a reliable and effective source of financing for new franchisees. The SBA 7 (a) loan program is the main loan program offered by the SBA to franchisees who purchase a franchise and create their franchise business. Under this program, the SBA does not lend, but encourages eligible BANKS of the SBA to lend to eligible start-ups and, in return, the SBA will repay a significant portion of the bank (up to 85%) guarantee. loan.
(1) The SBA`s current position, as communicated to us, is that a franchised brand must be included in the SBA franchise directory in order for its franchisees to be eligible, even if the company falls under the NAICS 72 code. Our interpretation of this provision is different from that of the SBA and we are actively working with our industry and government contacts to further clarify this point. This position may change over the next 30 days. Nevertheless, the SBA confirmed that the execution of Form 2462 (additional membership in the franchise agreement) for credits under the paycheck protection is also not necessary for trademarks in the SBA directory. A franchisor who wants its franchisees to be able to obtain SBA credits to finance their franchises must be included in the SBA franchise directory.