The Small Business Administration, in implementing its franchise loan program, has exposed itself to millions of dollars in unnecessary risk, according to a government report released yesterday.
SBA doesn't require franchisors to share the financial burden of starting a franchise, it often accepts weak types of collateral and frequently guarantees loans at the maximum legal rate, the report said.
The General Accounting Office report, requested by Rep. Ben Rosenthal (D-N.Y.), said that because of SBA's policies, the franchisor often benefits from the success of the franchise, but suffers little loss if it fails.
For example, 5.6 percent of all franchisors participating in the SBA's franchise loan program over the past 10 years account for about 75 percent of all money given to franchises, amounting to $674 million of $901 million disbursed in the program, the GAO said.
"Many of these franchisors were very large corporations such as automobile companies, oil companies and fast food chains that might have been able to finance all or a major part of the franchisees' costs connected with purchasing a franchise," the report said.
"How many prospective franchisees or small franchisors have been denied loans, because the available funds had already been approved or disbursed to prospective franchisees of large franchisors?"
SBA officials said franchisors weren't financing institutions, sometimes didn't have funds to make loans and requiring franchisors to accept loan applications would result in fewer loans to franchisees.
In addition, the report said SBA often doesn't follow its own guidelines to ensure loan payment.
GAO said the SBA hasn't complied with federal regulatory requirements of obtaining proof that a bank has refused a loan for a prospective franchisee before it offers a loan. The law requires that the SBA act as a lender of last resort, the report said. SBA officials said they already obtain sufficient proof of loan refusal by banks.
The franchise borrowers that the SBA assists could be helped more by the agency to ensure that any loans are repaid, the report continued.
"SBA does not provide the prospective borrowers information on franchisors or to assist them in making a decision on the business, such as SBA's loan experience with other borrower's of the same franchisor," GAO said. "Also, SBA does not always provide useful and timely counseling and assistance to these borrowers."
SBA officials said that their district offices don't have enough personnel or time to make visits or provide management assistance to all loan applicants and borrowers and that such visits should be made selectively.