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SBA’s Relationship with the Franchise Industry

Budget sequestration equates to a reduction of an estimated $900 million in actual lending.

President Dwight Eisenhower proposed the creation of a small-business agency, the U.S. Small Business Administration, in 1952. It was founded with a philosophy and mission as a response to the pressures of the Great Depression and World War II.  Since opening on July 30, 1953, the SBA has delivered millions of loans, loan guarantees, contracts, counseling sessions and other forms of assistance to small businesses.  Over the years, the SBA has grown its scope through various initiatives and programs to assist an even more diverse set of entrepreneurs to either start a business or grow an existing one. These entrepreneurs include women, minorities, armed services veterans and also specialty sectors such as disaster recovery and government contracting.

The SBA has been led by former businesswoman Karen G. Mills, serving in the position of administrator, since April 2009. In February 2013, she announced her resignation; Mills’ departure date is planned for July or August. During her tenure, Mills led an overhaul of the application process to streamline the user experience for various agency resources, launching online portals for federal contracts and disaster loan applications.

IFA Pres. & CEO Steve Caldeira, CFE, was recently quoted on the upcoming change at SBA:

“We (IFA) remain big fans of the current administrator. Karen Mill’s aggressive support for our industry’s concerns during the access to credit crisis; her enthusiasm for our VetFran program; and her willingness to voice small business’ concerns within the administration, has earned our trust and respect. My hope is that the president will expeditiously name her successor, and that it will be an individual who possesses the same laser-like focus to ensure the well-being and promotion of small business in America.”

SBA Lending Programs

The SBA administers two loan programs that entrepreneurs and franchisees often turn to when searching for capital to begin or grow a business.  Those are the 7(a) and the 504 loan programs.

It is important to understand how SBA plans to address these loan programs in the wake of sequestration, the government’s across-the-board budget cut. At this time, SBA is not forecasting any loan guarantee disruptions as a result of sequestration based on their current lending rate and end of fiscal year projections.

SBA’s 7(a) Loan Guarantee program is one of the most popular programs offered by the agency and is the basic SBA lending program. A 7(a) loan guarantee is provided to lenders to make them more willing to lend money to small businesses with “weaknesses” in their loan applications.

For example, a business startup would not have the necessary cash-flow history to provide a lender with assurance of continued ability to pay back a loan, so the SBA 7(a) loan would serve to provide the lender with an increased guaranty against default. The SBA warns, though, that lenders do not have to accept 7(a) loans.

SBA 7(a) loans are limited to a maximum of $2 million, with a guarantee of no more than $1.5 million (75 percent). The terms are 25 years for real estate and equipment and seven years for working capital. Interest rates are based on the prime rate, the size and the maturity of the loan. According to SBA’s website, the agency provides loans to businesses, not individuals, so the requirements of eligibility are based on aspects of the business, not the owners. As such, the key factors of eligibility are based on what the business does to receive its income, the character of its ownership and where the business operates.

Business Eligibility

The SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible.  However, there are some universally applicable requirements. To be eligible for assistance, SBA states business must:

  •  Operate for profit,
  • Be small, as defined by SBA,
  • Be engaged in, or propose to do business in, the United States or its possessions,
  • Have reasonable invested equity,
  • Use alternative financial resources, including personal assets, before seeking financial assistance,
  • Be able to demonstrate a need for the loan proceeds,
  • Use the funds for a sound business purpose, and
  • Not be delinquent on any existing debt obligations to the U.S. government.

504 Loan Eligibility

Another loan often utilized by franchisees is provided by SBA’s 504 Loan Program which gives small companies in development areas guarantees for loans for major fixed assets such as land and buildings for economic development.

The purpose of 504 loans is to improve the economy of a locality or to assist businesses owned by women, minorities, veterans, rural businesses, and other designated types of businesses. Some eligibility requirements for these loans are:

  • Operate as a for-profit company,
  • Do business (or propose to) in the United States or its possessions,
  • Have a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years, and
  • Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

The 504 loans are set up to work with Certified Development Companies – nonprofit corporations established for community development. Generally the project assets are used as collateral. The CDC/504 loan program is a long-term financing tool for economic development within a community. The program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings, through a Certified Development Company. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, with each covering a specific geographic area.

Budget Sequestration Implications

Now that budget sequestration is in effect, it is important to understand how the SBA plans to address this situation.  Currently, only a select few agencies have been granted the authority by Congress to adjust their budgets to allow shifting of funds between statutory appropriation categories to avoid budget cuts in certain areas.  The SBA has not been granted this flexibility. As a result, under sequestration, subsidy for SBA’s loan programs has received the 5 percent mandated cut, which equates to a reduction of an estimated $900 million in actual lending.

Based on current loan volume projections, SBA officials have said they do not anticipate having to resort to “loan holidays” or any disruption to loan approvals during this fiscal year (which ends Sept. 30). If those projections were to change and signaled any possibility of a disruption, SBA would notify lenders and small businesses of contingency plans for managing loan applications until the beginning of the next fiscal year on Oct. 1.

Judith Thorman is senior vice president, government relations & public policy for the International Franchise Association.  She can be reached at 202-662-0768 or


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