SBA Hot Topic Tuesday — Franchise Feedback, Debt-Refi Feedback and PARRis Review Eliminates Judgement Rankings in Numerical Ratings

September 15, 2015

By Bob Coleman
Editor, Hot Topic Tuesday

SBA Hot Topic Tuesday — Franchise Feedback, Debt-Refi Feedback and PARRis Review Eliminates Judgement Rankings in Numerical Ratings

One special assets reader adds two more things to consider in addition to the five listed yesterday in Main Street Monday.

6. Look especially hard at how a franchisor assigns territories and what distance is required between franchisees (The resolution process for territorial disputes is really important). A franchisor who “cannibalizes successful franchises is not worthy of any SBA dollars.

7. Look and see if the franchisor is the required principal supplier of inventory (and/or) equipment to the franchisee. This does not rule out a franchise but can be a device for hiding unconscionable fees.

Abuse of both of these was a hallmark of a recently Ch XI national sub franchise.

Editor’s note — The reference is about Quiznos which has a SBA 7(a) 36% default rate and a 25% charge-off rate for the ten year period ending December 31, 2014.

A question from a reader regarding using SBA 7(a) loan proceeds to refinance debt.

Question — I’m confused. With respect to your example of a prior rental property now business occupied wouldn’t the highlighted part here put us right back where we started? From your statement–
SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made unless the condition that would have made the loan ineligible no longer exists.

That’s much better and should open up new opportunities. Under our example, the underlying debt would be eligible to be refinanced – assuming it met the SBA’s other requirements – since the previous condition of the property once being non-owner occupied no longer exists.

And what are those other requirements?

  • The existing loan(s) cannot be on reasonable terms.
  • The debt must have been used (and documented accordingly) for eligible business purposes.
  • The loan(s) must meet at least one of the eight purposes for refinance listed in the SOP.
  • Payments cannot be made to creditors in a position to sustain a loss.
  • Unless refinancing short-term or ballooning debt, a 10% reduction in monthly installment payments must be reached.

Walter McLaughlin responds:

It’s one of those SOP verbiage issues that isn’t completely clear at first glance and could probably benefit from further clarification, or even an example or two.

That said, the key is that the ineligible condition (non-owner occupied at the time the loan was originally made) no longer exists. That recasts the original purpose into an eligible one as of the date the operating company occupied the property, Thus, with the new SOP verbiage, the formerly-ineligible purpose instantly became eligible for SBA refinance by virtue of the business moving in and occupying it. That makes the debt (as of that date) used for “an eligible business purpose” under the new SOP language.

I had one exactly like this about eight years ago, which SBA turned down for this very reason even though the business had been in it for at least five years.

Today, we could refinance that underlying debt.

PARRis Eliminates Judgement Rankings in Review Scores

Effective immediately, SBA is changing the terminology for the three PARRiS scores as follows: “1” – for performance within a “Lower Risk” range (rather than “Preferred”), “3” for performance within a “Moderate Risk” range (rather than “Acceptable”), and “5” for performance within a “Higher Risk” range (rather than “Less Than Acceptable”). All other aspects of PARRiS remain unchanged (See Policy Notice 5000-1332).