Debunking the Myths of Financing Franchises

by Joanna Bruno

Tips for business lenders

During a session about franchise lending at a conference we attended, lenders had positive comments about the franchise process but also expressed frustrations they felt kept them from making more franchise loans. In that light, we’ve had a frank discussion with FRANdata’s VP/Client Solutions Edith Wiseman, CFE, and COO/Director of Marketing Paul Wilbur to address areas of concern, clear up lender frustrations, and debunk “the myths” of financing franchises.

Myth #1: It’s necessary to match new franchise agreements (the legal, binding contract between a franchisor and franchisee) word for word with the documents on the Franchise Registry, and that minor typos or even one missing word will cause the SBA to not honor the guaranty. Additionally, some lenders felt the only way to ensure compliance is to hire a lawyer to review franchise agreements that have had minor modifications from the ones approved on the registry, adding to the cost of the project or making the project cost-prohibitive for small lenders.

Fact: “Lenders do not have a risk here,” Wiseman advises. “It’s understood that there will be corrections, clarifications and insignificant inconsistencies between the franchise agreements officially listed on the Franchise Registry website and the ones in use. There is no need for a second review intra-year and there’s definitely no need to hire attorneys to review the language. If it is already approved on the Franchise Registry in a particular year and the lender has a signed certification and has followed the items outlined on the certification, the SBA will not deny a guaranty based on the franchise agreement. It should be noted that to my knowledge, the SBA has never denied a guaranty when the lender has a certification signed.”

Myth #2: Franchise agreements for franchisors on the Franchise Registry need to be amended, reviewed and approved all over again by the SBA according to provisions in a new Standard Operating Procedure.

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