Major Regulatory Changes Are Coming to Franchising — Here's What You Need to Know

Key Points

• The SBA is reinstituting the Franchise Directory on August 1, 2025, meaning brands must be listed for their franchisees to qualify for SBA-backed loans.
• Under new SOPs, lenders will face stricter oversight and must independently verify that a franchise is directory-listed and that all documentation meets SBA standards.
• Franchisors must sign and submit a new Franchisor Certification by July 31, 2025, committing to seven compliance conditions or risk removal from the directory.
• The SBA has tightened its loan criteria, making models like ghost kitchens and shared spaces ineligible without narrow qualifiers, and now requires a 10% cash injection and “credit elsewhere” documentation for startups and ownership transfers.

The Small Business Administration (SBA), which provides approximately $5.6 billion per year in franchise loans, has reinstated key oversight mechanisms — including the Franchise Directory — and made updates to its standard operating procedures (SOP) for franchise lending. These changes aim to reduce risk, clarify eligibility and tighten credit standards, but franchisors must act quickly to avoid serious consequences for their businesses. Here's what you need to know.

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The Franchise Directory is back after a 2023 phase-out

Franchisors, take note: Beginning on August 1, 2025, your brand must be listed in the SBA Franchise Directory for your franchisees to qualify for SBA-backed loans. The Franchise Directory is the official list the SBA uses to determine if a franchise brand meets the agency's eligibility criteria. Sound familiar? That's because this used to be the rule until the SBA phased out the directory in 2023 as part of a short-lived policy shift that gave lenders more discretion in assessing eligibility. However, after a rise in defaults and documentation issues, the SBA has reversed course.

There's no cost for franchisors to be listed in the directory, but there is a clear process: Brands must submit their franchise disclosure document (FDD), franchise agreement and a signed SBA franchisor certification. Those who don't meet the deadline will be removed from the directory and will have to reapply before their franchisees can move forward with SBA financing.

Bottom line: If your brand is not listed in the directory, your franchisees can't get SBA funding.

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There will be stricter lender oversight

A significant shift in the SBA's new standard operating procedures (SOPs) is who holds the responsibility for verifying franchise eligibility for SBA loans. In the past, preferred lenders (PLPs) — banks and institutions authorized to approve SBA loans on the government's behalf — could rely on the SBA to validate if a franchise met eligibility standards. But that's not the case anymore.

Under the new SOPs, the lenders need to independently verify if the brand is listed in the Franchise Directory and ensure all required documentation meets SBA expectations. This change intends to reduce the risk of improper loan guarantees, but it also introduces more complexity for lenders and franchisors alike.

For franchisors, the takeaway is simple: Encourage franchisees to work with lenders that have experience in franchise lending, and ensure all documentation is airtight. A knowledgeable lender can help streamline the process, but even the best will still be navigating a stricter lending environment moving forward.

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Brands must submit a new document

If your franchise was previously listed in the SBA Franchise Directory, you're not automatically in the clear. To stay on the directory past July 31, 2025, franchisors must sign and submit a new document called the Franchisor Certification. The form includes seven key compliance conditions that the franchisor must agree to uphold across all franchise agreements, regardless of whether those provisions are explicitly included in the agreement itself. In other words, signing the certification is a legal commitment that your brand will operate in line with SBA lending requirements. That includes demonstrating active ownership, clear operational oversight and other elements designed to reduce risk and clarify responsibility.

Franchisors that fail to submit the signed certification by the July 31 deadline will be removed from the SBA Franchise Directory. Once removed, the brand becomes ineligible for SBA-backed loans until it reapplies and is reinstated. To avoid bottlenecks, franchisors should send the completed certification and all supporting documents directly to the SBA as soon as possible.

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Higher standards for business loans

The SBA has tightened its standards on which business models qualify for loans. For example, ghost kitchens, salon suites and shared office spaces are now ineligible unless they meet narrow criteria around revenue sources, customer access and operational control. Brands that generate income primarily from rent or don't maintain meaningful oversight of daily operations are at higher risk of being rejected for funding.

Meanwhile, personal service franchises — like barber shops, salons and nail studios — remain eligible, even if they use independent contractors. On the financing side, startups and full ownership transfers now require a 10% cash investment, and lenders must now document why a borrower can't qualify for a conventional loan — often due to limited collateral, a new business model or the need for extended repayment terms. These changes intend to reduce defaults and strengthen the loan process, but they also raise the bar for compliance.

What franchisors should do now

With SBA-backed financing playing such a critical role in launching and expanding franchise businesses, franchisors need to get ahead of these regulatory changes. That means submitting the required documentation on time, maintaining compliance with the new lending standards and working closely with lenders that understand the nuances of franchise financing.

With these changes, the SBA's message is clear: It supports franchising, but it's raising expectations to ensure a stronger, more resilient lending environment. Franchisors that act now will be positioned to help their franchisees access the capital they need to grow.

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