SBA Loans: Money to Franchisees





Franchisees can get guaranteed loans from the U.S. Small Business Administration (SBA). In fact, from 2000 to 2008, approximately 5 percent of SBA 7(a) and 504 loans, and more than 8 percent of the dollar value of those loans, went to franchised businesses.*

How did those loans perform?

The National Association of Government Guaranteed Lenders (NAGGL) provides data to answer this question. Here is a table that shows the average loan size, failure rate, and charge off rate for the loans okayed by lenders between the beginning of October 2000 and end of September 2008 to franchisees who were part of chains where at least ten franchisees obtained an SBA loan. While NAGGL is clear to point out that the data on which this table is based are volunteered by lenders and have not been verified by the SBA — caveats you should keep in mind when you look at the numbers — the statistics provide insight into the performance of SBA loans to franchisees.

SBA Loans: Money to Franchisees

Between the fourth quarter of 2000 and the third quarter of 2008, lenders made over 28,000 SBA 7(a) and 504 loans to franchisees in chains where at least 10 franchisees obtained an SBA loan. As you might imagine, these loans were not evenly distributed across franchise systems. Franchisees of the Subway Sandwich Shop chain alone accounted for over 7 percent of the total.

The average loan was $340,213. But, again, the average masks wide variation in the size of loans across franchise systems. The average loan was only $35,833 for franchisees in the 1-800-Got-Junk franchise system, but $1,450,182 for those who were part of Wingate Inns.

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NAGGL provides two measures of loan performance: the failure rate and the charge off rate. The failure rate is the “number of loans in liquidation or charged off divided by the number of loans disbursed.” On average, the failure rate was slightly over 13 percent of loans. But there was much variation across franchise systems on loan failures. At the low end, 90 franchise systems had no loans that failed. At the high end, Tilden for Brakes Car Care Center had a loan failure rate of 85.7 percent.

The charge off rate is the “dollar amount charged off divided by the dollar amount disbursed.” On average, the charge off rate of loans to franchisees was 2 percent, but, again, there was much variation across franchise systems. At the low end, 191 franchise systems had a zero charge off rate. At the high end, La Paletera had a charge off rate of over 40 percent.

Lesser performance of SBA loans to franchisees in certain systems might mean nothing. On the other hand, the wide variation across franchise systems in failure and charge off rates suggests the value to lenders and franchisees of closely examining why so many SBA loans to companies in certain systems failed, while those in other systems did not.

*7(a) loans are made by banks and other lenders, but guaranteed by the SBA. 504 loans are provided by Certified Development Corporations for purchasing assets like equipment and real estate.

Editor’s Note: This article was previously published at OPENForum.com under the title: “SBA Loans to Franchisees.” It is republished here with permission.

3 Comments ▼

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions
  1. Thanks for the info. Shane.

    I’ve seen some of these stats before, but I’m curious;

    Does it say anywhere if all of the SBA loans discussed and tallied were pure start-loans?

    Thanks!

    The Franchise King

  2. Dr Shane: You penned a very interesting article. I’m curious: is there a correlation between the failure rate and charge-off rate between the 7a and 504 notes? In addition, do lenders use the same decision framework to qualify borrows for these two separate lending channels? Lastly, how do you suspect lenders profile borrowers as to which fund they are steered to?

    Merry Christmas

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