SBA Loans to Franchises

There has been a lot of flurry on Linkedin.com against the continuation of the Small Business Administration and its loans. Many think the government should not get involved, but on the other side, complain that the present administration is not doing enough for small business.

There also have been many press releases and announcements of leasing companies wanted to do more Franchise leases; many of them with SBA financing, and they would not exist without them. Also many of the loans require additional financing, with lease financing very attractive.

There definitely is a trend that “franchise run” businesses have more success than privately run as they have the franchisor history, experience, expertise, and often backing to make it work.

The SBA was created on July 30, 1953, by President Dwight Eisenhower with the signing of the Small Business Act. Its function was and is to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns”.

“The Obama Administration has supported the SBA budget. Significant supplemental appropriations for the agency strengthened SBA lending through the American Recovery and Reinvestment Act of 2009 and the Small Business Jobs Act of 2010,” according to Wikipedia.

In this article, there are lists obtained from the SBA on the banks across the United States, how many SBA loans they have made, the dollar amount, and it certainly appears all size banks are involved in SBA loans. (1)

March, 2012
SBA LIBOR Base Rate = 3.24%
SBA FIXED Base Rate = 4.88%
January-March 2012
SBA Peg Rate = 2.38%

One group that is active is “SBA 504 Loans for Growing Businesses”

“The Small Business Administration 504 Loan Program is a long-term financing tool that promotes economic development within a community. The 504 Program provides small businesses with long-term, fixed-rate financing to acquire major fixed assets such as real estate or machinery and equipment for expansion or renovation. The small business is able to obtain up to 90% financing on these assets.”

The list is long here, too. (2)

Perhaps the criticism comes from the recent announcement that the Obama Administration wants to raise the SBA to a cabinet level agency. This article is not meant to be political in nature, and is not aimed at what the SBA does or doesn’t do, but to look primarily at the franchise industry SBA loan numbers.

Latest is a 2010 CNNMoney.com:

Franchises with the Highest Failure Rates, 2010:

Here are comments from the CNN writer, from worst to best:

Matco Tools franchise – 36%: “Tool manufacturer and distributor Matco is the riskiest investment on the top-10 “most popular” list, with more than one third of its SBA-backed loans going bad.”

Cold Stone Creamery franchise – 31%: “The product is sweet, but the financials can be bitter. In the last 10 years almost one in three SBA-backed franchisees defaulted on their loan.”

Quiznos franchise – 25%: “One in four franchise owners was unable to make good on their SBA-backed loan. Quiznos recently settled four class-action suits brought by its franchisees, agreeing to pay as much as $100 million to end years of wrangling over its pricing, royalties and fees.”

Curves franchise – 16%: “The overhead costs are pretty low, but the investment can be risky. Curves’ fast expansion goes hand in hand with a relatively high churn rate, and almost 16% of its SBA-backed franchise loans this decade failed.

The UPS Store franchise – 12%: “Seven years ago, they [MBE franchisees who converted] filed suit against UPS, and will finally take their case to trial later this month in Los Angeles. Meanwhile, UPS rolls on, adding new franchisees to its network for an initial fee just shy of $30,000.”

Franchises with the Lowest Failure Rates:

Super 8 franchise – 4%: “Getting into the motel industry is pricey… but it’s also a pretty safe bet. Among the handful of franchise brands… a notable number are hotels and motels. Super 8 has the lowest default rate on this top-10 list, hovering just under 4%.”

Days Inn franchise – 6%: “Days Inn is another member of the Wyndham Hotel Group’s franchise family. Launched in 1970, the chain currently boasts 1,900 hotels throughout 15 countries.”

Subway franchise – 7%: “With fewer than 8% of SBA-backed borrowers defaulting on their loans, Subway has a better track record than similar brands — rival sub shop Blimpie has a 46% loan failure rate, and Quiznos is also well into the double digits.”

Dairy Queen franchise – 8%: “Today, it boasts 5,700 locations around the globe and a single-digit failure rate for its SBA-backed franchise loans, making it one of the safer investments in the food franchise market.”

Dunkin’ Donuts franchise – 8%: “Dunkin’ Donuts’ modest default rate is matched by its corporate sibling, Baskin-Robbins, which had a 10% failure rate for its SBA-backed loans.”

http://www.franchisepublicity.com/failure-rates-of-the-10-most-popular-franchises/

The lists below shows those involved in SBA loans, as well as the 504 approvals, and while a list could not be found for loans to franchises, perhaps the failure list gives an indication of the loans participated with banks and the losses involved

(1) 100 Most active lenders

http://www.sba.gov/category/lender-navigation/lender-loan-data/100-most-active-sba-7a-lenders

List of All Banks: 436 pages with SBA loans & gross—link not pdf (would be too large):
http://leasingnews.org/items/
Copy%20of%20FY2011_Sep_30_2011.%20sba%20loans%20by%20bank.xls

(2) 504 Loan Approvals (105 pages)
http://leasingnews.org/PDF/504_Loan_Approvals_by_CDC_through_01_31_12.pdf

(3) Failure Rate Franchises (29 pages)
http://leasingnews.org/PDF/March_5_2012_SBA.pdf