Some 580+ SBA lenders attended last week’s NAGGL Spring Conference in Salt Lake City, and the FRANdata team was on hand to learn the latest in SBA lending and gauge how some of the largest franchise lenders are feeling about the current lending environment. From evolving credit risk concerns and policy clarifications to upcoming SOP changes and increased scrutiny on agent activity, this year’s sessions revealed both lender optimism and deep concern about navigating today’s heightened compliance and performance expectations. Here are some highlights–
Impact to Speed of Processing
25% of loans that the SBA Centers received were from Preferred Lenders. SBA has told Preferred Lenders that they don’t have the staff and since they have the preferred designation, they will not be able to send any loans to the Centers. This is an issue for some lenders because they were sending all or most of their loans into SBA. When they sent it into SBA, the lender had 100% guarantee that their guarantee would not be denied. This is no longer an option. Lenders indicated that there will be a slow down for loans that were previously sent to SBA.
To help, SBA has created an inbox where PLP lenders can send specific questions. But they cautioned lenders that while they can rely on answer given from the inbox, if a lender neglects details, the loan still might not be eligible or have a problem with their guarantee. The inbox will be manned by SBA staff that otherwise have full-time jobs, so it will be interesting to see if this is a useful and quick avenue for lenders. The answers from this inbox is loan specific and its not setting policy
SOP Changes
- SBA aims to clarify current contradictions and confusion in the SOP.
- New version expected within 2 weeks, before June 1st deadline.
- A redline version will be released.
- Mid-summer release of new SOP for servicing and liquidation, with an updated matrix.
- SOP rewrite completed in under 100 days— a record pace.
- SBA reminded lenders that the SOP sets minimum requirements, but lenders retain discretion to lend prudently. Apparently the Federal Reserve was concerned that the requirements were so low.
- The previous SOP was described as a “race to the bottom and digging a trench”
Redtape@sba.gov
The administration wants to decrease regulation. SBA has created an email that anyone can use to report on any regulation that you feel is unnecessary.
Redtape@sba.gov is the email
Citizenship Or 10 Year Green Card
- Its strange that SBA tells lenders to upload 81% of borrowers into the system to vet for nationality or visa status, they are responsible for 100% of the owners
- That means, ESOP and COOPs that have possible hundreds of people will all need to be vetted. Going forward, they have to certify that they will not allow any new members to not comply with the rules
- Business must be domiciled in the US
- Entity owners’s primary residence must be in the US
- No wiggle room or work around on citizenship requirements
Credit Risk, Fraud & Market Trends
- Significant concern over fraud in wire transfers and agent/broker activity.
- 50% of loan proceeds used for working capital requires justification. SBA saw a predominance of failure when a loan had 50% for working capital. Also, a lender must put a lien on all business assets when 50% of loan is for working capital.
- SBA is investigating default patterns, especially early defaults. Looking specifically at lender service providers and brokers.
- Growing interest in performance by disbursement cohort to predict risk.
- There were concerns over the decline in SBA lender participation and increased servicing burdens for both lenders and the SBA. Lenders were concerned that agency staff had been cut by 10%, and so would the SBA be able to support lenders in their servicing needs?
- SBA is seeing increased activity with lender’s primary regulators so lenders are getting pressure all around.
- Lenders shared that Business Development Officers are getting clawback on deals that failed in less than 18 months. This will of course prevent a BDO from doing another deal with a franchisor because it affects them personally.
SOP Lending Policy Insights
- Partial ownership changes: Only new owners need to co-borrow. Selling owner is on a conditional guaranty which will be released after 2 years; however it’s not automatic if the loan is underperforming which could mean that the lender is seeing late payments, negative trends in the business, or any way that it is described in the loan documentation. This means that the seller could be required to guarantee the loan for a longer amount.
- Supplemental and spousal guarantors: No spousal requirement; supplemental rules clarified.
- Must lien all business assets, especially when ≥50% of proceeds are for working capital.
- Small loans ($50K or less): Discussion on whether all available collateral must be taken.
- SBA clarified use of proceeds: Cannot disguise debt refinance as equipment purchase.
Fees, Agents & Broker Conduct
- Distinction between lender fees and agent fees: Agents charging consulting fees to borrowers is not allowed.
- Concern over agent/broker structures:
- Brokers referring to other brokers.
- Disbarred brokers feeding loans through others.
- Some lenders not reporting packaging fees in E-Tran (SBA loan software)
- SBA is sending lenders notices that they need to police referral agents and LSP advertisements.
- SBA stressed accountability: referral agents represent the lender; lenders are starting to track performance of their loan portfolio with each of their agents.
Underwriting & Documentation
- Alien status/citizenship:
- Must confirm with alien registration # or SSN.
- No flexibility—10-year green card minimum.
- Primary residence must be in the U.S. (IRS definition).
- Ownership rules:
- Only U.S.-domiciled entities can qualify.
- ESOPs and co-ops with indirect owners require upload of 81% ownership.
- Tax transcripts: Lenders dislike delays. Alternative: IRS-stamped tax copy + bank statement.
- Personal financials required for “credit elsewhere” test.
Loan Products & Structures
- CapLines: SBA discussed creating cap lines that are more inline with what borrowers need. Lenders were excited about this potential development.
- Up to $5M; can be term or revolving.
- Loan amount set by 1:1 debt service coverage ratio
- Could go from a revolver to a term loan which then could be sold on the secondary markets
- If a borrower pays down, then the lender can redisburse
- 10-year revolver + 10-year term possible.
- Lenders must term out unhealthy businesses.
- Complete partner buyouts: No projections needed unless debt service coverage is insufficient.
- CBD contained within business offerings flagged (e.g., massage, pet, nutrition shops). Not eligible unless the CBD is not in the offering.
Franchise-Specific Concerns
- Franchisor due diligence:
- Management experience, training infrastructure, growth plans, financials.
- IT will be easier for a franchisor to get an SBA loan then it did before
- There are states issues that conflict with SBA policy. They don’t consider the medical services agreements to be passive but SBA has to look into solving those issues.
- SBA wants more clarity in:
- Area rep vs. franchisor roles.
- Multiple FDDs and NAICS codes.
- Passive ownership, subfranchisors, and capital needs.
- Directory ≠ Credit risk evaluation. FUND Score matters.
- “If it’s not on the directory, it doesn’t mean it’s fundable.”
- SBA also indicated that the Hill has interest in franchise transparency, but lack of data hampers reporting.
Data & Scoring Discussions
- SBSS score minimum increased to 165, though 180 was preferred by credit staff.
- 165 was seen as compromise to avoid “shocking” the industry.
- Performance prediction at score 140 is poor.
- SBA reminded lenders about the:
- High costs of scores.
- Low pull-to-loan conversion (10-12 pulls per loan is too high).
- It used to be Score & Go, now they want Score & what else – lenders must go beyond scores.
Other Notables Insight
- SBA now has the ability to remove a franchisor from the Directory which they didn’t have before. This will be focused primarily on brands that it views as bad actors (e.g., burgerim – fraud cases).