When submitting loan packages to the SBA to obtain loan guarantee numbers, lenders need to determine if the loan meets affiliation standards. Franchise loans must meet both general borrower and franchise-specific affiliation tests. Most franchisors applied for and obtained franchise-specific eligibility approval. All a lender had to do was go to the SBA’s online pull-down menu and select the franchise brand associated with the borrower. That seemed easy enough.
Except it wasn’t. Franchising is constantly growing and changing. Over 250 new brands are created every year, posing an ongoing challenge for the SBA to stay current with any kind of simple pull-down menu.
Franchisors often create spin-off franchise brands that have similar names but differences in investment, product composition, customer, and delivery. With these changes, they have different lender risk characteristics and require separate affiliation determinations. Amplify that even further when you take into account the greater identification challenges created when there is typically 6,000 or so cases of franchisors changing their brand names and/or their “inc” names within the past couple of years.
Astonishing number, isn’t it? Here are some examples of a few franchise brands who have changed their names. Most of these changes are not subtle and have little similarity to their previous name:
- “Sitter’s Etc” is now “SEI Healthcare Services”
- “Lightbridge Academy” is now “Rainbow Academy”
- “Hispanic Tax” is now “Siempre Tax”
- “Look Good Naked” is now “Trumi”
- “MathWizard” is now “A Grade Ahead”
- “The Haven” is now “Avendelle”
The SBA realized it could not stay current with the pace of change in franchising so it adopted the solution that the private sector had already embraced – FRUNS. FRUNS (which stands for Franchise unique numbering system) was created to sort out the above issues for all stakeholders connected to the franchise business model – lenders, suppliers, other franchisors – in much the same way that a DUNS number is used to validate that a company exists.
By adopting the FRUNS system (like DUNS, available free of charge) SBA has made franchise loan applications much easier for lenders and minimized SBA’s likelihood for misidentifying franchise-related data (OIG pointed out in 2014 that the franchise code was a flawed system because changes such as the examples above weren’t accounted for).
As posted on The Coleman Report