June 14, 2023
C-Suite Wednesday – How SBA Lenders Can Determine Franchise Eligibility
SBA lenders must obtain the Franchise Disclosure Document (FDD) which contains information about the franchisor and the franchisee system.
This includes the franchisor’s background, the costs and fees associated with the franchise, the obligations of the franchisor and franchisee, and the terms and conditions of the franchise agreement. The document was designed to protect the franchisor and franchisee and is important in ensuring that the franchise relationship is based on transparency and mutual understanding.
Lenders are responsible for ensuring that the applicant meets eligibility requirements. To determine eligibility, lenders need to use the Franchise Disclosure Document.
To determine eligibility SBA lenders must obtain:
Franchise Agreement – SBA must review the franchise agreement to certify that it meets SBA requirements and that the franchisor has provided the necessary disclosures to the franchisee.
Franchisor’s Financials – In order to confirm that the franchisor is financially stable and has the resources to support its franchise system, the SBA must review the franchisor’s financial statements.
Franchisee’s Experience – To ensure the franchisee has the necessary skills and experience to operate the franchise successfully, the SBA must review the franchisee’s experience.
Franchise’s Performance – The SBA must review the performance of other franchisees in the system and check that the franchise is viable and has a successful track record.
Franchise’s Size – The SBA reviews the size of the franchise to confirm that it meets the SBA’s size standards for small businesses.
Once it is verified that the franchise meets all the SBA’s requirements, it will be eligible for SBA financing.