The key component of the U.S. Small Business Administration (SBA) mission is to help small businesses. In order to do this, the SBA is required to develop industry size standards for what is classified as a “small business.” One measure used is to differentiate businesses by NAICS code (North American Industry Classification System), either using an average maximum number of employees over the past 12 months or using the maximum average annual receipts over the past three years to represent the largest size a business may be to remain classified as a small business.
Under the SBA 504 program an alternative method is to show that the business, no matter the NAICS code, has less than $15 million net worth, in addition to the company’s average after tax income for the previous two years being less than $5 million.
Where this can become more complicated is when the applicant business has affiliation with another business. Affiliation with another business requires that the annual receipts, or employees, or net worth and income, are added together to show on a combined basis the total is still under the maximum allowed as a small business.
Potential affiliation is a real concern when the applicant business operates under a franchise. If the franchisor exerts too much control over the franchisee, affiliation between the two is created. In most cases, the combination makes the franchisee ineligible for SBA financing due to exceeding the small business size standards.
Starting January 1, 2018, the SBA created the SBA Franchise Directory (https://www.sba.gov/for-lenders) which includes all franchise and other brands reviewed by the SBA that are eligible for SBA financial assistance. This includes brands that meet the Federal Trade Commission (FTC) definition of a franchise, as well as any relationship established under a license, jobber, dealer, or similar agreement. This includes any fuel agreements for convenience stores (C-Stores) and new car manufacturer dealer agreements.
For any applicant operating under a franchise or other such relationships, the SBA must pre-approve the agreement and add it to the Franchise Directory before HCDC can submit the application to the SBA for loan processing and approval.
If considering SBA financing to a franchise or business operating under a brand, a first step is to check the SBA Franchise Directory to see if it has already been approved by SBA. If it has not been, the franchisor must submit documentation to firstname.lastname@example.org for approval before a loan can be processed at the SBA.