California Auto Dealer – SBA Loans and Manufacturer Requirements

April 2020

Over 30 Years of Handling Buy/Sells for New Car Dealers
   April 2020
SBA Loans and Manufacturer Requirements
As auto dealers across the country are applying for SBA loans, many may not realize that the SBA now requires auto manufacturers to agree to be listed in the SBA franchise directory in order for their “franchisees” to obtain SBA loans. The issue does not typically come up until the dealer has qualified for the loan and the SBA circles back to the dealer if the manufacturer is not listed in the directory. 

Some manufacturers, like Nissan and Subaru, have worked out arrangements with the SBA to be listed in the directory and to modify their Dealer Sales and Service Agreements to address concerns that the SBA has about the manufacturer exercising its right of first refusal. Others, such as GM, have not. In the past, GM has refused to assist dealers who wished to obtain SBA loans because they did not want to be listed in the directory, which identifies the manufacturer as a franchisor. I am told they have now been added, but I am not seeing their name there when I look at the directory. 

There has been a long-standing debate over whether auto manufacturers are franchisors. Franchise laws in some states provide protections to franchisees that are not provided in other states based on the argument that auto dealers are not franchisees. California provides most of the same protections to dealers in the Vehicle Code, rather than under the franchise laws. To be a franchisee, a fee typically has to be paid to the manufacturer for the franchise. Since auto manufacturers do not charge dealers a fee to get the franchise, they are arguably not franchisees. The counterargument is that they are franchisees because if they require their dealers to buy products from them and charge the dealers more than they charge others for the same products (as GM has been accused of doing with its wholesale parts), then the added charge to dealers is a franchise fee. The manufacturers who have agreed to be listed in the directory, have also agreed to amend their dealer agreements with dealers who apply for the SBA loans. The changes to the dealer agreement address the SBA concerns about the manufacturer rights of first refusal.  

If you have not heard about this issue and you have applied for an SBA loan, ask your lender if your manufacturer is on the SBA franchisor directory or check the directory yourself on the SBA website or by googling “SBA franchise directory.”  Because SBA loans are typically two loans, one from the lender and one from the SBA, make sure when you ask the question and confirm the answer, you are asking about the SBA portion of the loan, not the bank portion of the loan. The banks generally do not have the requirement, but you will need to meet the SBA requirements to get the loan since it includes the SBA portion of the loan (even though it is all coming from your financial institution).

If your manufacturer is not on the directory, you will want to start working with them now to come up with a solution acceptable to both the manufacturer and the SBA. Manufacturers who have not been willing to be listed on the directory, may now agree to help out their dealers. If you get a letter from your manufacturer with an addendum to your dealer agreement, run it by your attorney before signing it to make sure you understand what you are signing. The addendum will likely be necessary to get your SBA loan. If the manufacturer has thrown in provisions that are illegal, you will want to deal with that now so it does not hold up your loan. 

Erin K. Tenner is a partner with Gray·Duffy, LLP and has been legal counsel representing auto dealers in buying and selling auto dealerships for more than 30 years. She can be reached at 805-551-1318.


Please Note: 
These articles are necessarily general in nature and do not substitute for legal advice with respect to any particular matter. Readers should consult with an attorney before taking any action affecting their interests.

California Auto Dealer is a registered trademark. The content of this Newsletter may not be duplicated without permission. If you know someone who would like to receive this newsletter, have them email Erin Tenner: [email protected]

Please Note: This article is necessarily general in nature and is not a substitute for legal advice with respect to any particular case. Readers should consult with an attorney before taking any action affecting their interests.