How PPP Loans Can Help Franchisees Save Their Businesses

As part of the CARES Act, the Paycheck Protection Program was designed to support small businesses affected by the COVID-19 outbreak through forgivable federal loans meant to be spent on securing staff and other expenses. Many brands within the franchise industry have struggled to qualify for these loans.

Now, franchisors across all segments have been working hard to educate franchise owners on the CARES Act and the application process, to ensure that each franchisee has the greatest chance of receiving funding. 

“So far, we’ve seen around 70 percent of franchisees with existing bank relationships receive funding, while those who are trying to go through a larger bank are struggling,” said MOOYAH Burgers, Fries and Shakes Vice President of Operations Mike Sebazco. “It is important to remember that this is meant to be a funding for small businesses, which is where we exist, and it has the opportunity to be the lifeblood for a lot of our franchisees.”

Like many brands, the MOOYAH Burgers, Fries and Shakes leadership team worked hard to position franchisees for success and educated each franchise owner on financing options, including SBA loans and the CARES Act. Their mission was to get everybody through this crisis, and the PPP loans were the primary way to do so. 

“Overall, this PPP process has been a roller-coaster of emotions,” said Wisconsin-based MOOYAH franchise owner Josh Bergeson. “I handle all of the accounting for our small business, and the beauty of a franchise system is having a leadership team that understands these processes and is able to communicate the best ways to apply for funding. Also, being able to leverage the franchise as a whole to get a fair shake at the PPP money has been very helpful.”

While the $660 billion Paycheck Protection Program was instituted to give small business owners a lifeline during the coronavirus and economic shutdown, the application process certainly hasn’t been easy, as many struggle to be approved. According to a CNBC/SurveyMonkey Small Business Survey released Monday, which surveyed 2,200 small business owners across America,  only 13% of the 45% who applied for the PPP were approved.

Typically, the Small Business Administration classifies business as “small” only if they employ fewer than 500 people. Because of franchisor approval rights and transfer controls in franchise agreements, franchisees are often considered to be affiliated with franchisors and are prevented from accessing SBA funds without special modifications to the franchise agreement. 

However, the CARES Act contains a specific affiliation test exemption for franchised businesses (franchisors and franchisees alike) seeking relief as part of the PPP. To ensure that as many businesses as possible in the restaurant and hospitality sector — including franchised businesses — can still take advantage of CARES Act relief, the act and the interim regulations released notes that each franchise entity within a franchise system listed on the SBA Franchise Directory may apply for a PPP loan. Listing on the SBA Franchise Directory exempts only the franchise entity from the PPP affiliation test; each franchise entity still must meet the eligibility requirements for a small business to participate.

Although these modifications help franchisees, the program was widely criticized for favoring larger companies. Unsurprisingly, the first round of PPP funding was quickly exhausted. However, Congress infused the PPP with an additional $321 billion on April 24, along with new guidelines from the SBA designed to prevent large and publicly traded companies from receiving PPP loans. The SBA began accepting new applications on April 27. 

“Borrowers still must certify in good faith that their PPP loan request is necessary,” the SBA wrote in an FAQ. “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

While many large companies, such as Potbelly and Shake Shack, have returned their loans amidst the new guidelines, others are defending the rights of franchisees. In a recent interview with CNBC, Subway CEO John Chidsey defended the company’s franchisees who applied for small business loans to help offset the economic impacts from the coronavirus pandemic. 

Still, it is clear that franchisees are struggling to receive proper funding. According to a new lawsuit filed in federal court in Washington, D.C., the Small Business Administration has discriminated against "franchised businesses in general and commercial cleaning franchises in particular" by "unlawfully restricting eligibility for loans" under the temporary Paycheck Protection Program.

On the other hand, many small businesses have been turned off by the program’s strict restrictions. For example, the 25/75 rule that says business owners must use 75% of the funds they receive only for payroll, and 25% for rent, mortgage payments, utilities and other operating expenses in order to get loan forgiveness.

While franchising comes with its own set of challenges in regards to PPP loans, for many franchisees, this crisis has further illuminated the value of a franchise network. “We are blessed to have a strong franchisor help us through this, and we are excited to come out of this stronger and continue to support our communities,” said Bergeson.