The SBA recently published Information Notice 5000-1322 which became effective on October 10, 2014.  This Information Notice sought to clarify what had become a confusing issue for many Lenders.  There has been a recent business trend of "salon suites" types of businesses in which one business owner leases out small independent business suites that each act as its own separate small business.  Do these businesses fall under the umbrella of typical barber shops, hair salons, nail salons and similar businesses that are considered eligible businesses under the SOP, or are they considered passive and ineligible? The SBA now clarifies that they are not eligible, and Lenders should make sure they understand the difference to ensure they do not make any loans that will later be deemed ineligible.

Barber shops, hair salons, nail salons, and other similar types of service businesses are eligible under the SOP 50 10 5 (G).  These businesses typically employ individuals or independent contractors and appear to operate as one single business.  This business model generates its income based on its services provided and promotes job creation in order to do so.

The concept of a "salon suites" business model as the SBA labels it, is for the building owner, or business owner leasing the space to make significant alterations to the space in order to create smaller, private spaces for individual businesses to lease.  These small businesses typically share a common area, but the individual businesses maintain their own private space.  These business models are ineligible for two primary reasons.

First, the business model in the "salon suites" scenario typically generates most of its income through leasing the space to these third party, independent small businesses, who then in turn perform the services for customers.  This scenario is too passive for the SBA loan program which is designed to encourage job creation, not the use of loan proceeds to improve rental space for Landlords.  The only exception to this rule when the Landlord is an Eligible Passive Company.

Second, this business model typically uses a significant portion of loan proceeds to make improvements to the space which is then rented to third parties.  The alterations are crucial in creating the individualized smaller spaces that is leased to the third party businesses.  However, when loan proceeds are being used to renovate the leased or purchased building, SBA guidelines require the business who received or benefitted from those loan proceeds to occupy the majority of that entire space, and also 100% of the renovated portion of the space.  This SBA provision flies directly in the face of the Salon Suites model which uses loan proceeds specifically to renovate space for lease to third parties and generate passive income. 

The SBA has made it clear that these types of businesses will not be considered eligible for SBA financing.  For more information on franchise eligibility and other SBA related issues, please contact Tim at tdlauro@starfieldsmith.com or at 267-470-1182.