Franchises are among the most commonly financed businesses in SBA lending. The model makes sense — proven systems, established brands, existing customer bases. But the SBA has a detailed, specific process for franchise loans that goes well beyond standard business acquisition rules.
If you’re buying a franchise with SBA financing, you need to understand the Franchise Directory, the FTC definition, management agreement rules, and what your lender must verify. At GoSBA Loans, we navigate these requirements daily. Here’s the complete playbook under SOP 50 10 8.
The FTC Definition: What Makes It a “Franchise”
The SBA doesn’t use its own definition of franchise. It uses the Federal Trade Commission (FTC) definition from 16 CFR § 436. Under the FTC definition, a relationship is a franchise if it meets certain criteria involving:
- The franchisor’s trademark or trade name
- Significant control or assistance in the franchisee’s business operations
- A required payment of $500 or more within the first six months
The SBA takes an expansive view: even if a relationship is labeled a “license,” “jobber,” “dealer,” or “similar agreement,” if it meets the FTC’s franchise definition, the SBA treats it as a franchise. This includes:
- Petroleum Marketing Practices Act (PMPA) agreements (gas stations, fuel distributors)
- New car dealer agreements that meet the FTC definition
- Any license or similar agreement that functionally operates as a franchise
The SBA Franchise Directory: Your First Step
SBA has created the SBA Franchise Directory — a database of all franchise and brand models that SBA has reviewed and determined eligible for SBA financial assistance.
The Fundamental Rule
If the applicant’s brand meets the FTC definition of a franchise, it must be on the Directory to obtain SBA financing.
No exceptions. If the brand isn’t on the Directory, the loan cannot proceed until the brand is added.
What the Directory Tells You
For each listed brand, the Directory shows:
- Whether SBA determined the brand meets the FTC definition of a franchise
- The SBA Franchise Identifier Code (only assigned if it meets the FTC definition)
- Whether the brand has been determined eligible for SBA financing
Important Caveat
Placement on the Directory is not an endorsement or guarantee of the brand’s success. It only means SBA has determined the brand is eligible under SBA’s criteria.
What Your Lender Must Do
Before processing your franchise loan application, the SBA lender must:
- Check the Directory to confirm the franchise brand is listed
- Verify the brand name and type of agreement matches what’s on the Directory
- Enter the franchise name and SBA Franchise Identifier Code when submitting the application in E-Tran
- Obtain a copy of the executed franchise agreement and any other documents the franchisor requires the franchisee to sign
If the brand is on the Directory, no other franchise documentation needs to be submitted to the SBA loan processing center. This is a significant streamlining — previously, lenders had to submit and SBA had to review franchise documents for every loan.
Adding a Brand to the Directory
If the franchise brand isn’t on the Directory, it must be added before the loan can proceed. The process:
- The franchisor submits the agreement, Franchise Disclosure Document (FDD), and all required franchisee documents to franchise@sba.gov
- SBA reviews the documents (in the order received)
- If eligible, SBA sends a Franchisor Certification for the franchisor’s authorized representative to sign
- Once the signed certification is returned, SBA lists the brand on the Directory
This process takes time. If you’re buying a franchise from a brand not yet on the Directory, start this process immediately — well before you need the loan.
Management Agreements: The Ineligible Passive Business Trap
This is where franchise loans get tricky. A franchise agreement itself doesn’t create an ineligible passive business (since 2023 rule changes eliminated affiliation analysis for franchise agreements). However, management agreements can.
The Rule
If the management agreement is part of the franchise disclosure documents (FDD) for a brand listed on the Directory, the lender does not need to separately review it.
But if the applicant uses a management agreement that is not part of the FDD, the lender must review it to determine if it makes the applicant an ineligible passive business.
What Makes a Business Ineligible
A management agreement creates an ineligible passive business if it gives the management company sole discretion over the business operations — including decision-making over employees, finances, and bank accounts — with no involvement by the owner(s).
However, if the management company does not have sole discretion and the applicant exercises “meaningful oversight,” the applicant is eligible. Meaningful oversight means the management agreement provides for the applicant to be involved in operational decisions.
The Franchisor-Affiliated Management Company Rule
If the management company is, or is affiliated with, the franchisor, the applicant is not eligible. The SBA views this as the franchise model not resulting in the franchisee operating as an independent small business.
This rule eliminates a common structure in hospitality and food service where the franchisor (or a related entity) manages the franchisee’s operations.
Multiple Agreements and Multi-Brand Operations
If the applicant operates under multiple agreements (multiple product lines or franchise brands):
- The lender must check the Directory for all of the applicant’s agreements that meet the FTC definition
- If any agreement that meets the FTC definition is not on the Directory, the application cannot proceed
- If any brand has been determined ineligible, the loan cannot be processed — regardless of whether that specific brand meets the FTC definition
- The lender enters the franchise code for the brand generating the largest share of revenue in E-Tran
Exception: Single Non-Critical Agreement
If the applicant operates under a single agreement that represents 50% or less of revenues and is not critical to the operation, different rules apply. For example, an auto body shop that also rents trucks under a franchise agreement (10% of revenue) — the lender checks the Directory, but the non-critical agreement gets lighter scrutiny.
Franchise Development Agreements: Ineligible
Franchise Development Agreements (also called Master Franchise Agreements) — where the developer gets a geographic territory to establish franchise units operated by other franchisees — are ineligible for SBA financing. The SBA considers these passive businesses since income comes from royalties on other franchisees.
However, Multi-Unit Franchise Agreements (where the franchisee has rights to develop additional units that the franchisee or its affiliates own and operate) may be eligible, provided the applicant and its affiliate units are small.
Franchise-Specific Credit Analysis
When the application involves a franchise, the lender’s credit analysis must include:
- Review of any credit information provided by the franchisor
- The number of failed franchisees (typically found in the FDD)
- Cash flow projections provided by the franchisor
- Assessment of the franchise system’s overall health and the applicant’s territory
While the lender is encouraged to review the FDD for financial information, they’re not required to retain a copy in the loan file. They must retain the executed franchise agreement and any other documents the franchisor requires.
Change of Ownership: Buying an Existing Franchise Location
Buying an existing franchise location (as opposed to starting a new one) triggers all the standard change-of-ownership rules:
- 10% minimum equity injection for complete changes of ownership
- Business valuation meeting SBA requirements
- Seller restrictions (cannot remain as officer, director, stockholder, or employee)
- Franchise transfer approval from the franchisor
- The new franchise agreement must be for a brand listed on the Directory
Questions and Appeals
- Policy questions: franchise@sba.gov
- Appeals of a Directory exclusion: Submit to franchise@sba.gov with explanation and documentation
- Reconsideration of FTC franchise determination: Submit to franchise@sba.gov with supporting documentation
Common Franchise Loan Mistakes
- Not checking the Directory first: The very first step. If the brand isn’t listed, nothing else matters until it is.
- Ignoring management agreements: Non-FDD management agreements must be reviewed for passive business issues.
- Franchisor-affiliated management: Automatically makes the applicant ineligible. No workaround.
- Buying into a brand with an ineligible sister brand: If any brand in a multi-brand operation is ineligible, the entire loan is blocked.
- Not starting the Directory addition process early: Adding a brand takes time. Start before you need the loan.
The Bottom Line
SBA franchise loans are streamlined compared to past years — the Directory has eliminated much of the document review burden. But the rules around management agreements, multi-brand operations, and ineligible structures are strict and specific.
Buying a franchise with SBA financing? Contact GoSBA Loans — we’ll verify Directory eligibility, review your franchise structure, and guide you through every step of the SBA franchise loan process.
