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SBA Loans for Franchises 2010-2019

SBA Loans for Franchises from 2010-2019

What is the SBA

The U.S. Small Business Administration, commonly referred to as the SBA, is the only cabinet-level federal agency fully dedicated to supporting small businesses and entrepreneurs from counseling to capital. Many small businesses turn to the SBA for loans, as SBA loans typically have lower rates and longer durations compared to other traditional bank loans.

SBA 7(a) Loan Program

The SBA’s most popular loan program is the 7(a) loan for small businesses. The 7(a) loan provides financial assistance for entrepreneurs starting a new business or acquiring, operating, or expanding an existing business. The loans must be approved by the SBA.

SBA Data Analysis

Fiscal Year 2010-2019 7(a)

Vetted Biz has reviewed and analyzed the SBA 7(a) loan approvals from the fiscal years 2010-2019. The records were obtained through SBA’s official website.

Over 567,734 small businesses in the U.S. were approved for the SBA 7(a) loan from 2010 to 2019. These businesses are categorized by the North American Industry Classification System, NAICS. In total, there were 1,221 NAICS classifications.

SBA Analysis of Franchises

Of the 567,734 businesses approved for a 7(a) loan, over 50,466 of these businesses were franchise concepts representing roughly 8.8% of approved loans. There were 524 NAICS classifications for businesses that were franchises, and many of the NAICS categories did not accurately reflect the nature of the franchise business. Also, many of the franchises had different NAICS classifications for each individual loan. Therefore, Vetted Biz recategorized them by 14 industries that more accurately reflect the business nature of these franchises. Listed below you can find how many loans were approved for each industry.

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Franchise Industries receiving SBA 7(a) Loan Approval from 2010-2019

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Franchise Industries SBA 7(a) Loan Approval from 2010-2019

Total Loans (%)

 Adjusted Total SBA 7(a) loans for franchises and industries from 2010-2019 excluding loans not disbursed (Cancelled and Commit Loan Status)

The chart above shows that the most popular industry, amongst loans issued within the SBA 7(a) program, excluding loans with the status of Cancelled and Commit, was the Food and Beverage industry which had a total of 13,151 loans disbursed within the past decade. This industry was closely followed by the Retail Products and Services and Hospitality industries which had a total of 5,882 and 4,707 loans disbursed respectively. 

Paid In Full Rate (%)

 

SBA Default Rate by Franchise Industry

Further analysis was conducted by franchised industries
based on their loan status. The following loan status categories are listed
below. Please note the most important loan statuses to understand in this
analysis are ‘Paid In Full’ and ‘Charged Off’.

 

According to the analysis the Health and Beauty industry
category reached the highest adjusted paid in full rate of 63% which shows that
such franchises pay off the loan completely and therefore might have a higher
loan approval chance. The Travel and Hospitality industry has the least charged
off loans which could indicate that such franchises are also able to pay off
their loans.

SBA Loan Statuses

  • Paid in Full: Loan has been repaid if full including all principal and interest payments
  • Charged Off: Loan no longer has reasonable expectation of further payment after default
    • Defaulted: Loan payment has been overdue for over 90 days
  • Commit: Loan undisbursed, also labelled as Not Funded
  • Cancelled: Loan is cancelled by borrower or occasionally by SBA if description does not follow terms of use
  • Exempt: Loan is exempt from disclosure under FOIA Exemption 4, which protects “trade secrets and commercial or financial information obtained from a person privileged or confidential.” Exempt loans also include outstanding loans. 

The best loan status reflecting financial health of the franchise is Paid in Full, as the business has already paid off the loans and all interest. In contract, the worst loan status is Charged Off, as the loan has defaulted and further collection of debt is doubtful. The SBA recognizes this as a loss and removes the account from its active accounts receivable.

Vetted Biz reviewed the 50,466 franchises that were approved for the SBA 7(a) loan from 2010-2019. Of the franchises that were not exempt, most franchises had a Paid In Full loan status, while only 2-3% of franchise loans were Charged Off. This breakdown demonstrates the overall strength of franchise operations despite recent economic downturns. 

SBA Loan Status per Industry

Vetted Biz reclassified the 500+ NAICS industries into 14 industries for the franchises studied. Within each industry, we studied the rate of the two most important loan statuses, Paid in Full and Charged Off Rate. Below you can find the adjusted results of both for each industry with a further breakdown of how many businesses in those industries had that loan status. Adjusted results exclude loans that were “Committed” or “Cancelled” due to the fact that these loans ended before they were ever disbursed by the lender.  

From 2010 to 2019, SBA loans issued to franchises in the
Travel and Hospitality industry had the highest Paid In Full rate of 33.79% and lowest Charged Off rate of 0.51%. Although many prospective franchisees first
explore franchise opportunities within the Food and Beverage industry, it is
advisable to also explore other industries like Travel and Hospitality to see
how the concepts perform financially overall. The Travel and Hospitality
industry is largely dominated by hotels and motels.

 

Some industries at the same time have a wider gap between
businesses that are doing well and those that are not. In other words, taking more
risk can lead to more reward. For
example, the Food and Beverage industry had one of the highest Paid In Full
rates of 32.45%, while also having a high Charged Off rate of 3.50%. On the
other hand, industries that had lower Paid In Full rates such as the Real
Estate and Fitness Center industries, with 27.79% and 26.87% respectively, also
had the lowest Charged Off rates of 1.05% and 2.04%. 

When prospective franchisees are exploring what is the best franchise for them to invest in, it is also important to understand the industry a franchise is in. Reviewing the SBA 7(a) loans is just one of many different factors to consider when analyzing the success of franchise industries.

Paid in Full : Charged Off Ratios

From 2010 to 2019, SBA franchise loans in the Travel and
Hospitality industry had the highest Paid In Full to Charged Off ratio, where
for every 66 loans that were paid off in full, one of them was charged off.
Similarly, the Fitness Center industry, which encompasses fitness studios or
gymnasium services, also had a relatively high ratio where for every 35 loans
that were paid off in full, only one of them was charged off.

Beyond the Travel and Hospitality and Fitness Service
industries, most industries had a Paid In Full to Charged Off Ratio of around
10 to 20 loans that were Paid In Full, to one that was then charged off.
Additionally, the Automotive and Education Programs industries had the lowest
ratio, were for approximately every 4 or 5 loans that were paid off in full, 1
other was eventually charged off.

 

When prospective franchisees are studying the best
industries to invest in, beyond looking at separate numbers and loan statuses
in general, it is important to understand how the industry functions as a
whole. That said, the Paid In Full to Charged Off ratio allows for an extensive
insight into how industries and their SBA loans in general are doing that are
helpful in guiding the franchisee on the best franchises to consider investing
in. 

Limitations and Future Research

Of these franchised businesses, 66% had an exempt loan status. Therefore, most of these businesses were not able to disclose whether they had Paid In Full, Cancelled, or Charged Off on their loans. Although additional information on what a loan’s exempt status encompasses can be found on Vetted Biz’s platform, this nevertheless limits an accurate analysis of SBA franchise success overall. 

In the FOIA 7(a) Report, most businesses from the same franchise were labelled with many different NAICS classifications. For example, Subway, the Food and Beverage franchise with the most units in the U.S., had 915 different NAICS classifications. Vetted Biz cleaned the data for this report to ensure the same franchise is categorized in the same industry.

 

Furthermore, some industries like the Real Estate and Home Services industries only had a few hundred businesses with loan approvals compared to most industries that had a few thousand. Therefore, one or two businesses in smaller industries that had a Charged Off loan status would drastically affect the Charged Off Rate. 

Paid in Full Rate

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