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The Small Business Administration has committed $350 million in federal funding to create a lending program for small businesses. The loan, called the *SBA 7(a) Loan*, is available only to small U.S.-owned or -controlled companies that have annual revenues of less than $3 million and total assets of less than $6 million. A 2016 report showed that just over 1%* are defaulting on their loans*.
The “best franchises to own” is a list of the top 20 SBA-funded franchise brands and the 20 franchisors with the highest default rate.
Every year, more than 20,000 franchised firms are launched in the United States. Franchises, on the other hand, are not all created equal. We looked at SBA 7(a) loan data from 2010 to 2021 to find which franchises received the most SBA loans and which franchisees were the most effective in repaying those loans. During the same time period, we looked into which franchisees had the highest rates of SBA 7(a) loan default.
Top 20 SBA-Financed Businesses
An examination of the top twenty franchises
When all of the loans from the 20 franchisees in our list were added together, the default rate was 4.3 percent. Between 2010 and 2021, SBA 7(a) loans defaulted at a rate of 9.9% on average across all franchisees. The default rate for each of the top 20 franchises was lower than the overall franchise average.
In 11 years, just one of these franchisees had a charged-off SBA loan, with the UPS Store and Orange Theory Fitness having no change-offs at all. With a default rate of 9.82 percent, Firehouse Subs has the highest default rate among the top 20. Between 2010 and 2021, Subway had the most total charge-offs, with a total of 60. However, their default rate of 7.32 percent was lower than the average SBA loan default rate for franchises.
The 20 franchises with the highest SBA loan default rates are shown below.
Note: We only looked at franchisees that had at least 25 SBA loans created between 2010 and 2021 since we didn’t think anything less would be statistically significant.
How Did We Come Up With Our Rankings?
The 20 franchises with the largest SBA loans, as well as the 20 franchisees with the highest SBA loan default rates, were collated. These rankings were based on information gathered from the Small Business Administration (SBA) on 7(a) loans issued to franchisees from 2010 to 2021. 7(a) loans are the most common of the many forms of SBA loans that are guaranteed by the SBA, with franchisees accounting for around 10% of 7(a) loans.
An SBA 7(a) loan’s status may be one of four things at any one time:
- The loan was paid off in whole and on schedule by the borrower.
- Charged off: When a borrower defaults on a debt, the lender suffers a loss.
- Canceled: The borrower settled the debt with the lender for less than they owed, resulting in a loss for the lender as well.
- The loan is still unpaid at this time.
We divided the number of charged-off loans for each franchise by the total number of loans for the franchise, excluding presently existing loans, to get the SBA loan default rates. Because the repayment status of the borrower may change in the future, loans that are now due are omitted.
How to Boost Your Franchise’s Success Chances
Here are four things you can do to improve your chances of success if you decide to launch a franchise.
1. Request the Franchise Disclosure Document from the franchisor.
The expected expenses of owning and operating the franchise are outlined in the Franchisor Disclosure Document (FDD). The franchisor is legally compelled to deliver this paperwork before you pay any money to them. It may assist you in obtaining the funds you want to be successful. Franchise disclosure documents (FDDs) can contain profit predictions, which can assist you analyze franchise performance.
2. Take into account your previous experiences
To operate the franchise effectively, you need ideally have some experience. Do you have experience in the foodservice or restaurant sectors, for example, if you’re beginning a McDonald’s franchise? Do you have any general company management experience, such as recruiting, training, and marketing? When it comes to hurdles, starting a franchise without any experience might put you at a disadvantage.
3. Assess the Physical Environment
Your franchise’s location may make or ruin it. A Subway in downtown San Francisco is almost certainly more expensive to run than one in rural Pennsylvania. The San Francisco Subway, on the other hand, is expected to have a far larger user base than the Pennsylvania Subway, which helps to balance the expense. This is a compromise you’ll have to think about carefully.
4. Make sure you have enough money to cover your expenses.
Purchasing a franchise is not a guaranteed bet. You must be well financed, just like any other small firm. Delays in your location’s development, poor customer growth, unanticipated competition, litigation, or unrelated personal concerns may all lead to a franchisee defaulting on an SBA loan. When faced with hardship, an undercapitalized franchisee is more vulnerable than others.
Finally, do your homework on the franchise and all that will be expected of you as the owner. Doing your study ahead of time will help you avoid unpleasant surprises and put you on the road to franchise owning success.
More Information on Starting a Franchise
There are many franchise possibilities available, and owning a franchise may be a profitable way to start a business. Before purchasing a franchise, it’s critical to gather as much financial information as possible. When deciding which franchise to buy, you need take into account more than just SBA loan statistics.
Many additional considerations come into play, such as launch expenses, licensing fees, the amount of workers you must manage, and the popularity of the franchise among clients. If you’re seeking for additional information on franchises, check out our posts on the greatest franchises under $10,000 and the best franchises under $25,000.
Once you’ve decided on a franchise, you’ll probably need some funding to get started. Only a few businesses provide in-house franchise finance, but the vast majority of franchisees do not. SBA loans, which are accessible from both local and national lenders, are one of the most popular small company lending alternatives for franchisees.
Consider utilizing FranFund if you intend to apply for an SBA loan. FranFund specializes in franchise finance and may obtain an SBA loan of up to $350,000 in as little as three weeks. If you have relevant business expertise and require quick SBA funding, a free consultation can help you get started.
Visit FranFund for more information.
Conclusion
Because SBA loans are one of the most common franchise financing choices, it’s important to utilize this information to help you make an educated decision about which franchisees are profitable. In recent years, banks have granted billions of dollars in SBA-backed financing to franchisees. The capacity of a franchisee to repay an SBA loan is determined by a number of criteria. The fact that a franchisee defaulted on an SBA loan does not automatically imply that the franchise is unsound or a poor investment. Loan default data, on the other hand, is an important factor to examine when deciding whether or not to invest in a franchise.
The “preferred sba lenders” is a list of the top 20 SBA funded franchises and the top 20 franchises with highest default rate.
Related Tags
- local sba lenders
- sba preferred lender list 2021
- sba preferred lender list 2020
- sba 7a lenders
- how to search for a franchise
