Small Business Loans and default rate
- Phaedrus Apr 7, 2013 02:59 PM
This is a local Dayton report on the default rate of SBA loans. Much of the default comes from franchise restaurants, three names that comes up are Cold Stone Creamery, Subway, and Quizno's.
This is an area that I have a lot of experience in. I worked at a bank that had an SBA loan specialist on staff.
I want to forget the number of SBA loans gone bad I had to take through work-out. The SBA has rather strict guidelines and banks need to triple check EVERYTHING because the government will not pay out on the guaranteed loans if the bank didn't follow the guidelines to the exact letter.
The bank I worked at had an unwritten rule of no loans for restaurants or bars. SBA loans are enough of a cr@p shoot as it is, borrowers with stars in their eyes over a "sure thing" franchise could not be educated or reasoned with.
I met with probably one person a month that wanted to borrow to buy a Sunbway franchise. (Answer was always no) The barriers to entry are rather low and there are no terriorty restrictions so it is actully not that hard to open a Subway shop. The Quizno's that openned in my area didn't last long.
Franchises have a notoriously high rate of failure except for maybe McDonald's, which is very careful about where its franchises are located and other aspects of the franchisor-franchisee relationship. You will rarely see a McDonald's go under.
People open small businesses with little more than an idea. They know nothing of start-up costs, bookkeeping, licensing, taxes, employment law, leasing, food safety laws, purchasing, etc. People who dream of being their own boss think a franchise will somehow allow them to skip acquiring all the knowledge they need to run a small business. Wrong. Seriously wrong. Many years ago, when I was a lawyer, I had a string of clients who thought that purchasing a franchise was a ticket to the good life. By the time they got to me, they were broke, in trouble with the IRS, state tax people, often had employment complaints pending, personal injury lawsuits, you name it. They would complain to me that the franchisor hadn't given them any training, or that the training was deficient. And perhaps that was the case, but they shouldn't have been buying a franchise if they had no business experience or knowledge whatsoever.
However, your statement about the franchises is misleading. The article states that the number of Subway defaults was about 1/5 those of Quizno's (or QuizSnots, as we call it, after the singing snot commercials); only 4.8% of Subway loans went bad compared to 23.4% of Quizno's loans. In the Dayton area, "The sub shops also dominate the nine-county Dayton region in numbers of SBA loans, but the disparity is even more stark. While Subway franchises took out more than twice as many 7(a) loans as Quiznos (35 to 16), only one Subway loan (2.9 percent) failed and was charged off compared to six (37.5 percent) of the Quiznos loans."
So just saying "three names that comes (sic) up are..." implies that they are all equally problematic when the article makes clear that this is not the case.