SBA Hot Topic Tuesday — SBA Proposes Changes to Affiliation Rules

October 6, 2015

By Bob Coleman
Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday — SBA Proposes Changes to Affiliation Rules

SBA continues to simplify its rules and make it easier for Main Street to obtain access to capital.

I’ve attempted to make the proposed changes easy to understand. The three major PROPOSED changes affecting the SBA 7(a) and 504 loan programs are:

  1. Control of an entity will be defined by who owns the most stock, or who is officer managing the business.
  2. Only close relatives will be subject to the “identity of interest” affiliation rule, not business partners.
  3. Franchise agreements reviews will be limited to the applicant, not any affiliates.

(p.s. If you agree with the proposed changes, send SBA an quick email supporting the changes!)

Current Affiliation Rule:

Affiliation exists when one business controls or has the power to control another or when a third party controls or has the power to control both businesses.

Proposed Affiliation Rule:

SBA will determine control exists based on ownership when:

  1. A person owns or has the power to control more than 50% of the voting equity of a concern; or
  2. If no one person owns or has the power to control more than 50% of the voting equity of the concern, SBA would deem the small business to be controlled by the officer who controls management of the business.

Affiliation and Family-Owned businesses

SBA is proposing to use a different affiliation rule concerning “identity of interest.” Currently, SBA determines affiliation between individuals or firms when these individuals or firms have substantially identical business or economic interests.

SBA proposes to presume that there is an identity of interest only between close relatives. SBA proposes to retain this affiliation principle based on the customary understanding that close relatives have an overarching and close alignment of interests and a strong financial incentive to participate in and support family businesses.

Affiliation and Franchise Agreements

SBA proposes to make one change to the existing language affecting affiliation based on franchise agreements.

The proposed regulation would limit franchise reviews to the immediate loan applicant, and not consider other agreements in place with affiliated entities.

The proposed change would revise the first sentence: “The restraints imposed on a franchisee or licensee by its franchise or license agreement related to standardized quality, advertising, accounting format and other similar provisions, generally will not be considered in determining whether the franchisor or licensor is affiliated with an applicant franchisee or licensee, provided the applicant franchisee or licensee has the right to profit from its efforts and bears the risk of loss commensurate with ownership.”

With this change, SBA will still have to consider the size of any affiliate entities, but will not be required to examine any franchisor/franchisee relationship of the affiliated entity.

The remaining language will stay the same and still require a review of a franchise/license agreement as it pertains to the applicant.

All comments to the proposed changes must be received by December 1, 2015.

For emails: Include RIN 3245-AG73 in the subject line of the message.

Read the entire notice here.