Recipients of guaranteed franchise loans from the Small Business Administration representing some of the nation's largest companies have defaulted or liquidated loans totaling about $92 million, a congressional subcommittee was told yesterday.
Many of the loans studied were made primarily between 1967 and 1979 to franchisees of large automobile, gasoline or fast-food companies, according to records accumlated by the General Accounting Office.
For example, Shell Oil Co. franchisees received 107 loans totaling $2.9 million, and 32 percent of them defaulted for a total loss to the federal treasury of $346,000. In another case, franchisees of Ramada Inns Inc. received 31 SBA loans worth $8.2 million. The GAO said recipients had defaulted on $1.3 million of the loans.
"To me it's shocking that the U.S. government is assuming a loss on franchises that were initiated by major American corporations," said Rep. Benjamin Rosenthal (D-N.Y.), chairman of a House Government Operations subcommittee on consumer affairs that held the hearing.
Since the program was started in 1959, the SBA has issued more than 16,000 of these loans worth more than $1 billion to help entrepreneurs launch franchised businesses.
But Henry Eschwege, director of the Community and Economic Development Division of the GAO, told the subcommittee that although SBA regulations are designed to make sure that the agency limits its risks and acts as a lender of last resort, SBA officials rarely made sure that the potential borrower first was rejected by a commercial lending institution.
Eschwege also said there is little evidence that the SBA considers whether the franchisors had been approached about funding the franchisees before the agency issued the loan. The SBA "may be providing financial assistance from nonfederal sources," Eschwege said. The GOA official added that the agency's records are in "disarray."
Further, Eschwege suggested that franchisors have little incentive to insure the success of the franchisee. "The franchisors may often suffer only minimal loss, other than perhaps a temporary reduction in income, from the financial failure of a franchisee, as the franchisor would likely find another" franchisee, the GAO official said.
Although the values of the loans to the large companies paint a more dramatic picture of the volume of the program, many smaller companies have even higher default rates, ranging from about 35 percent to 100 percent, the GAO research disclosed. In fact, franchisees for fast-food firms such as Chicken Delight Inc. and Mister Softee Inc. defaulted on more than two-thirds of their SBA loans.
But Rosenthal and Rep. John Conyers (D-Mich.) both said they are particularly concerned about the default rates on the loans to franchisees of the larger corporations. At one point, Rosenthal suggested that the loans represented "a free ride" for corporations such as Mobil Oil Corp., whose franchises defaulted on 16 percent of thier loans for a total loss to the government of more than $163,000.
Franchisees of American Motors Corp. defaulted on 19 of their 102 loans, originally worth $6.8 million, for a loss to the government of $393,160, according to the GAO calculations.