SBA’s Risky Franchise Lending

Nicole Kaeding The Small Business Administration’s (SBA) stated mission is to aid small businesses and strengthen the economy. Under its popular 7(a) program, SBA provides private lenders with loan guarantees. In the case of default, SBA steps in to cover up to 85percent of the lender’s losses. This structure encourages lenders to provide more loans, but also encourages the approval of riskier loans. The lenders are insulated from most of the risks of default.   A new analysis conducted by the Wall Street Journal confirms that this arrangement induces SBA to provide loans that result in a large number of defaults. Default rates for some franchise companies can be as high as 40 percent. According to the Wall Street Journal: Quiznos, Cold Stone Creamery, Planet Beach Franchising and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of Small Business Administration loan defaults. Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-backed franchise loans in the past decade. Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013. Thirty percent of the loans provided to Quiznos and Cold Stone Creamery franchise...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs