FRANCHISE NEWS-: SBA New Loan Rules for New Franchises In less than a month, securing loans through the U.S. Small Business Administration (SBA) is expected to become more complex for emerging franchisors and first-time franchisees, following a major shift in how small business loans are evaluated.
In January, the SBA announced it will discontinue the use of the FICO Small Business Scoring System (SBSS). Effective March 1, SBA 7(a) loan applications will no longer receive an SBSS score, and the agency will stop using the score as an initial screening tool.
SBA Shifts to Traditional Credit Analysis
Alongside the change, the SBA is updating its small loan procedures to rely more heavily on generally accepted commercial credit analysis practices. This may include lenders using their own internal credit scoring models, similar to those applied to non-SBA commercial loans of comparable size.
Under the revised criteria, lenders must conduct deeper evaluations of borrower financials, credit history, projected cash flow, and collateral. For franchise loans, this scrutiny extends further.
Increased Review of Franchise Systems
Lenders will now be required to analyze franchise-specific data, including:
- The number of failed franchisees within the system
- Unit-level performance indicators
- Systemwide cash-flow projections
- Overall operational and support structures
According to Edith Wiseman, president of franchising research firm FRANdata, the removal of the SBSS score could significantly affect smaller franchise concepts.
Potential Impact on Small-Investment Franchises
Wiseman said feedback from lenders suggests the change may discourage lending for startup franchise concepts.
“From what we understand from the lenders we’ve spoken to, it’s going to be very difficult to finance a startup franchise without the score because it takes more time, and for some lenders it may not be worth it,” Wiseman said. “One lender told us that most of their issues come from small-dollar loans. Larger loans are performing, but smaller ones are not.”
The SBA defines small loans as those up to $350,000. Loans above that amount fall under the standard 7(a) loan program, while SBA Express loans are available for amounts up to $500,000.
End of the “Score-and-Go” Process
Wiseman noted that the SBSS score was originally intended to fast-track smaller loans, which often carry higher risk. However, she said the automated process sometimes encouraged approvals that warranted closer review.
The SBA’s move, she said, should lead to more thorough underwriting and better risk management, even if it slows the process.
Tools to Help Lenders and Franchisors Align
To help franchisors prepare for the increased scrutiny, FRANdata has developed a lender-franchisor alignment form, currently in the testing phase. The form is designed to provide lenders with key information upfront.
It addresses questions such as:
- Growth plans and expansion strategy
- Use of franchise sales organizations
- Net worth and liquidity requirements
- Franchisee support systems
“If lenders have this information before evaluating a loan, they can determine whether the opportunity is a good fit much earlier,” Wiseman said.
This preparation is particularly critical for brands with fewer than 100 units, Wiseman added. While some lenders may be comfortable financing systems in the 50- to 100-unit range, concepts below that threshold are likely to face greater challenges.
Educating Franchisees Will Be Key
Wiseman emphasized that franchisors must also help educate potential franchisees on the lending process and expectations.
“One of the biggest challenges is that many borrowers are completely unprepared,” she said. “Most franchisees have never applied for a loan before, so they don’t know what lenders require. Having a lender-ready package early can significantly improve efficiency.”
More experienced franchise owners, she said, may find the transition easier, particularly when seeking working capital or expansion loans.
SBA Still Supports Small-Dollar Lending
Despite the changes, Wiseman stressed that the SBA remains committed to small-dollar lending.
“These loans will still happen,” she said. “They’ll just take longer and require more documentation, especially for new borrowers.”
Recent SBA Moves Affecting Franchising
The loan scoring update marks the second major SBA decision impacting franchising in less than a year.
In June 2025, the SBA reinstated the Franchise Registry, which had been eliminated in 2023. First introduced in 2018, the registry allows lenders to quickly confirm whether a franchise brand meets SBA financing eligibility requirements.
The SBA also restored a 10% equity injection requirement for businesses less than two years old applying for 7(a) loans — another factor franchisors and franchisees must now plan for
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