Crooked Lenders Hurt Franchise Borrowers

May 20th, 2010

The Wall Street Journal reports today how franchise and small business loan brokers manipulate data on Small Business Administration loan applications to gain loan approval for their clients.The SBA in March of this year warned borrowers to beware of loan consultants "if the agent controls all communication between the lender and the business owner, suggests inflating financial sheets, or insists on using specific appraisers to evaluate the business."

If the loan application needs manipulation in order to gain approval the borrower should be especially concerned.

"business owners—wittingly or not—may become entangled in the fraud. "Business owners may think that providing inaccurate information in a loan application is merely unethical," says Mr. Harris, but if "they are caught up in a federal investigation, the government may attempt to prove they intended to defraud the U.S."" - WSJ

This is not to claim that all loan consultants participate in this fraud. There are loan consultants who act ethically and honestly and have the client's best interest in mind. However, once approved, borrowers are now "taking on loans that can't be repaid, which can result in serious financial trouble for the borrower."

Related Reading:

May 20, 2010 - 10:46am

Loan brokers sink franchisees before they even start

How pervasive is this problem in franchising?

There have already been reports from BMM on <a href="http://www.bluemaumau.org/7460/franchisees_kept_out_earnings_forecasts_…; target="_blank">Funding Solutions</a>, and now the WSJ on <a href="http://online.wsj.com/article/SB200014240527487036918045752543716132430…; target="_blank">Abacus Finance Inc.</a>. Their false numbers are often helped and collaborated by franchisors.

Do the big lenders cook the numbers too?

Old Sword

May 20, 2010 - 14:20pm

Re: Loan brokers sink franchisees

While, admittedly, not an expert, it appears as though they do. My reasoning:

1. SBA lender banks are required under SBA SOP's to collect the annual P&L and/or Income Tax Statements every year from each and every borrower. Since most franchisees receive their funding from a handful of the larger banks, one would believe that those banks, with possession of those documents, have the real revenue information for the franchise systems they loaned to. If they performed their required duties of collecting these statements then, after a dozen or so loans, they would clearly see what the revenue stream is for the first year site of a particular franchise system and should be able to compare the real numbers to the projections on the SBA loan application.

2. SBA lender banks are required under SBA SOP's to perform a "reasonability" test on the projections submitted with the loan application. Bank lending officers tend to consult a resource book called "RMA Annual Statistics". This book compiles revenue reports for numerous companies in most, if not all, the industries (i.e. apparel, information tech, software development, fast food, janitorial companies, educational companies, etc.). However, where does the publisher of this book get the revenue information from? The banks themselves. Now, here is the tricky part. According to my friend, many of the 'revenue' numbers submitted to this publisher are taken off of - the projections from the loan applications!! IF this is true then the banks are verifying the projections (which are grossly inflated in order to meet the minimum debt coverage ratio standards of the SBA) with, get this, projection numbers!! So, the banks can now claim they have performed their "reasonability" test even though they are checking the numbers with the same numbers. Funny, how all these SBA loans are able to get through!

The main reason why I believe this to be true is that there is no other way the projection numbers would match up with the book's numbers. So, these loan consultants (who the franchisors usually direct the franchisee to) will place projection numbers down that meet the SBA minimums and send them to the banks (who the loan consultants usually have a relationship with and, at times, will receive a loan referral fee from, even though they are paid by the franchisee as well - a violation of SBA SOP's), the banks, in turn, get to make a loan that has a 90% (now) guarantee, so they have no risk, and collect the fees, etc associated with the loan.

My question to everyone is this: Given a set of SBA loans all with the same loan amount, if a bank has ONE successful SBA loan, how many defaulted loans - after one or two years - can the bank sustain and still financially break even with, given the fact that the banks have a 90% loan guarantee from the government? If the bank as one $300,000 loan that works, will it take 3 loans of the same amount to default for the bank to hit break even? 4 bad loans? More? How many loans have to default before the bank stops making money with just one successful loan?

May 20, 2010 - 17:55pm

If banks sell off SBA loan portfolios like they sell off loans

generally, then the lending bank always makes out just fine. Somewhere down the chain of pass the trash some "holder" of the loan would take the hickey.

Some part of me would like to know about this - but I concern myself mainly with the moment at which someone deecides whether or not to buy a franchise, not with the downstream vicissitudes of loan holders.

I suspect that these SBA loans would be packaged with other loans, so that they are in a larger population when dumped, so that the number of franchise startup SBA loans that fail would have a much smaller impact on the "bundle" of which it was a part.

Is there a www.Shylock.com website where you can go learn about stuff like this?

May 21, 2010 - 16:22pm

SBA at Utube

I went looking for information on SBA loans and ended up desperate and at UTube thinking it would be a waste of time. And it was except I couldn’t believe the endless SBA clips there from so many different ‘consultants’. Many were obviously sleazy. Others were better at selling.

I cannot find anything worthwhile, anywhere, that describes how the banks deal with SBA write offs. Perhaps the banks can afford a little pain or possibly they see any cost as a cost of massaging compliant government.

But who pays in the end …If ‘ the government may attempt to prove they [franchisees] intended to defraud the U.S’ then why wouldn’t the gov’t go after the bigger accessories to the fraud where detection shouldn’t be that difficult. Wouldn’t you just start with default data and tie to lenders. He who scores well goes to goal.

It does seem, looking at SBA loans from a distance, that the temptation to manipulate was always going to be too huge. Can someone tell me where the taxpayer safety net is? Apparently there isn’t one for the statistically ‘foolish’ borrower.

Can anyone outline where the Canadian model differs?

The Business Development Bank of Canada was able to lend up to $13 billion in total to 28,000 small and medium enterprises, with a default rate of just 5 per cent on the loans. Aus

May 21, 2010 - 16:25pm

OK Here it is Listen up.

The IFA was founded by the former general counsel of the Congressional committee dealing with Commerce or whatever sub category within that subject matter - Phillip Zeidman.

The deal was that the IFA arranged for the SBA small business start up loan program to provide federal capital guarantees for the loans - reducing bank risk on those loans.

This infused enormous contingent government funding into small business start up lending and fueled franchising - somewhat like the oil rushing into the Gulf of Mexico.

When I tell you about buying yourself some government, I aint kidding. The taxpayers are buying all these bozo franchises when the loans go bad. The taxpayers will pay for the oil disaster (almost all of it). The name of the game in dealing with the governmetn is to get together enough lobbying money to get the government to underwrite your program. No one does iot better than the IFA and the petroleum industry.

May 21, 2010 - 17:58pm

$70 to 83 Billion subsidy

Richard,

Dr. Veronique de Rugy estimates that the U.S. taxpayers on the hook for $70 to 83-billion in SBA loan losses. Some addtional background on the the U.K. and CDN scene guaranteed loan scenes.

May 21, 2010 - 18:07pm

Canadian guaranteed loan program

Ray,

The Canada Small Business Financing progam is alive and racking up record future liability for taxpayers.

Please see:

Franchising more than helps flush +$100 million CDN annually down the toilet

Any movement in AUS to mimic the program? Here's a link to an Industry Canada 2007 study summarizing these types of programs, by country.

May 22, 2010 - 00:08am

SBA not such a good idea

So if the business isn’t worthy of standard credit approval these business get questionable approval without much by the way of a viability check-up, creating increasing loss all around except where the banks clean up at high rates, money circulates, spin machines create votes while taxpayers pay and not know why, how and how much they are paying. Franchising is just the perfect fit in that borrowing over 40% more and with a 3.5 times greater failure rate.

I thought it might be more efficient to cut out the middle folk and for government to just hand over multi-million/billion dollar checks to banks but then I realised that would mean missing out on stripping all those little folk along the way. That is not nearly as good a deal if you consider another 53 years of growth. Apparently SBA loans hold more value than a focus on credit for businesses with high success potential to both contribute and grow.

The Australian opposition is suggesting a ‘possibility’ of a‘government-backed bank to lend money to small and medium companies.’ If that happens it would seem we might have a serious bloody problem as it would work the same way where debt was on sold and eventually, based on Australia’s recent history, the state bank falls over.

You just watch the FCA will get behind this and push like bloody hell to make it happen. Les, could I get a copy of that spreadsheet.

May 22, 2010 - 00:36am

Ratio of loss: public/private

Ray,

This is simply a guess but I'd think that there is $10 to 20 (more?) lost in life savings for every $1 in public money.

The guarantees act as a powerful method of persuading the unwary as to the value of the wonkiest opportunities. Tip-of-hat to Michael re: showing me Bob Cialdin's work on Weapons of Influence.

Files send in triplicate.

May 22, 2010 - 18:57pm

Oldsword

Thanks Les, received and read.

Oldsword, you’ve been screaming about manipulated SBA loan applications at BMM for a long time and with no help from your mate Beanie.

Having just spent most of the last 18 hours reading what I can on SBA loans and similar programs I now suspect that manipulated loans are far more than an ignored element of such programs.

I suspect manipulated loan applications would be quietly but systematically encouraged. We are talking about megamoney across these programs.

For me my senses have suggested for some time that conspiracy theories should be considered as theories regarding plots so cunningly constructed as to minimize or eliminate evidence of their existence. Should I trust words from government or banks or the evidence that makes the hair on the back of my neck come to life?

Government guaranteed small business loans are pure debauchery and they obviously don’t perform for their country’s economy. At best they could be described as bandaid politics. They would give prolonged life for franchises that could not survive on merit and while there is political spin benefit, the banks are the only real winners.

I think of the multitude of really ‘wonky’ franchises that aren’t investment worthy where people get sucked in and I wonder how easily they get taken when they also get sucked into something like a ‘government backed’ [must be OK] SBA loan.

And the IFA etc will tell you there are no systemic problems in franchising. Does it get paid by direct deposit or brown baggie?

Old Sword

May 22, 2010 - 19:58pm

Ray, thanks for paying attention

Ray, FINALLY, someone is getting it (well, those of us who took out SBA loans for franchises "GOT IT" already, making it difficult to sit down, but I digress). It is time for BMM to research and investigate this problem. Why those of us at BMM instead of the government? (I'm sorry but bear with me because this is a long one.)

Well, I have had many multiple personal conversations and many multiple emails with Dan O'Rourke, Assoc. Inspector General, Investigation Division and Aaron Collins, Special Agent in Charge, Eastern Region - both of the SBA OIG's office. They have been involved in an investigation regarding my allegations. Do you want to know their final response? They are looking the other way. Even though the SBA's Standard Operating Procedures (SOP's) specifically state that "projections" are the most important aspect of the loan application. Were they able to prove that every franchisee loan made for my system in the years 2006/2007 had those inflated projections? Yes, every one.

Ray, once the projections (which are manipulated or "grossly inflated" by the loan consultants) meet the SBA's minimum debt coverage ratio the loan is 90% approved. (For those franchisor apologists who have claimed in the past that there is no debt coverage ratio requirement please Google "SBA debt coverage ratio", you might learn something.) BEST PART Ray? With the SBA's NEW small business loan program - the 90% guarantee loan - the debt coverage ratio was lowered, yes, LOWERED!!!! So, now you can scam even more franchisee newbies because it takes less lying to obtain the loan!! SUCH A DEAL!! (and curious that the banks are now approving a record percentage of franchise loans with this new program).

All kidding aside, the SBA has been involved in a number of fraud scandals in the past including BLX which was big. Unfortunately, this scam that I have mentioned too many times before is many multiple times that amount. Of the two gentlemen mentioned above, one of them performed a preliminary investigation and specifically stated "this is huge". I replied "____, you still have no idea how huge." However, this case is politically radioactive for several reasons:

It would ruin franchise lending. The SBA, namely Dan and Aaron, now know that a significant number of franchisors are fully aware that their systems do not generate the gross and net revenues needed to meet SBA's minimum requirements. They also now know that fraudulent gross and net revenue numbers are being used as "projections" which essentially guarantee loan approval. Their findings, if publicized (they have effectively killed the investigation which I may go into another time) would destroy franchise SBA loans and require franchisors to publish their real numbers.
The most important reason: It would make fools of the SBA OIG's office once again. After BLX, where the SBA (and I believe the SBA OIG's office) was caught trying to bury a hundreds of millions of dollars of SBA loan fraud case, I believe the SBA OIG's office wants to make sure they don't have another huge black mark against them. Also after BLX, the U.S. Government Accountability Office, the GAO (a gov't watchdog agency), found the HUBzone scandal where the SBA was again involved in another loan fraud debacle. So now, after looking bad with BLX and having someone else humiliate them on HUBzone, the SBA and the SBA OIG, in my opinion, will do anything, including burying this scandal, in order to save face.

Lastly, the banks ARE involved (in my very humble opinion). Why?

The SBA SOP's require the banks to get annual P&L's and/or income tax filings each year from every borrower - which would show that the franchise borrower's were NOT hitting their projections NOR the minimum SBA required debt coverage ratios, (the OIG's investigator on my case requested that each lender bank for my franchisor's loans in 2006 and 2007 send their loan docs to him for review. He told me that when he asked them for the above mentioned P&L's, etc. they said they didn't have them. Convenient since those docs would prove that the projections were inflated and also show the banks weren't performing their required duties (and also convenient because I, and a number of my fellow franchisees that I questioned, all sent our tax returns into our lenders) which leads me to #2.
The SBA SOP's required the banks to perform a "reasonability" analysis of the projections and that the banks, instead of using the real information provided by P&L's, etc. were most likely using a resource book called the "RMA Annual Studies". Funny thing about this book. It gets its statistics from the banks themselves and then the publishers collate the information for the book. However, what I am told is that the banks use the inflated projections from the loan applications to report the earnings numbers -- not the P&L's from actual audited financials. This would make complete sense because, if they used the real P&L's (especially in my franchisor's case) the numbers in the RMA book would be HALF of what the projections are on the SBA loan application thereby raising a red flag regarding the projections. Since we conclusively proved that my franchisor's real gross revenues were half ($250,000) of what the loan consultant placed on all the SBA loan applications ($500,000+), there is no way the banks were forwarding the real numbers. So, the banks were verifying the inflated gross revenue projections by looking at a book that was using the inflated numbers for their statistics.

These two points don't even touch upon the GUARANTEES!! These loans are pure profit. The banks have laid off the risk to the federal government and the U.S. taxpayers. They don't care that franchisees are getting stuck, they only care that they collect significant fees and easy money and they don't want the gravy train to end. They want this scam to continue because they get the consultants to "feed" them essentially riskless loans.

May 22, 2010 - 23:47pm

Damage control

The ultimate damage control is to bury the damage, deny its existence and distract with something that will make headlines. That then becomes malicious and obviously government after government need to play along.

I don’t know enough of these programs to differentiate between the need to hide embarrassing incompetence or whether, or to what degree, corruption plays a part. It smells a lot.

It is deficient people in the management of countries when they lower themselves to rely upon fraudulent systems as part of building an economy. If a small business person was to operate this way the collapse of the business would be the penalty. Here taxpayers and small business people have their money stolen to prop up economies - they pay the penalty. Franchising is a perfect fit.

Someone in Australia recently responded in a newspaper to our government’s super tax on our mining industry. That industry and small business is the absolute backbone of our economy. He suggested that the government should tax the banks instead to cover its disasterous management and monster screw-ups. I suggested that would be like an employee demanding money from an employer.

Oldsword; Les Stewart and many others obviously got this a long time ago. I maintain a strong faith and believe that in time everything that should hit the fan will. WWW helps ...

But in the mean time I suspect the Australian gov will run with something similar at some stage. The decision makers will see it as too profitable to ignore.

May 21, 2010 - 19:56pm

Re: SBA at Utube"d" (you know where)

Richard did a nice job with the ten thousand foot view. More specific to your question, I have spoken directly to the Assoc. Inspector Gen'l of Investigations, Daniel O'Rourke and the Special Agent In Charge, Eastern Region, Aaron Collins. The fact is: they don't give a crap!!

They have been fully informed about how the scam works and after first looking into it I was told "this is big". Unfortunately, if you know anything about the history of the SBA or the SBA OIG's office, when the going gets tough - the tough find a way to bury in the information. In fact, if you know anything about the BLX scandal, it involved fraudulent SBA loans in the hundreds of millions. And where was the SBA (and, I believe, the SBA OIG's office) during all of this - trying to hide the scam from the government. It was eventually found out and publicized because, from what I understand, an individual refused to give up and finally got it out into the public domain. Congress excoriated them for their attempt to cover the scandal up.

Now, they have another scandal worth many times more than BLX and they are doing everything possible to make sure it doesn't get out. They want this buried. DEEP. Our bureaucrats are more concerned about protecting their positions and pensions than preventing the fraudulent conveyance of tax payer dollars.

Now, with the Obama administration trying to paint a picture that they are for the small business man, they have created a program to piss away billions more to this scam and prop up the SBA. Hell will freeze over before these bureaucrats in the SBA and the SBA OIG's office grow the cojones to do their jobs.

Granville_Bean

May 23, 2010 - 19:33pm

so much SBA

Why so much SBA. We've been Zees for 15 years, multi-unit, never had an SBA loan. You don't have to go SBA if you have a good plan to show your lender.

Old Sword

May 24, 2010 - 14:55pm

Re: So much SBA

Granville, I will give you that you have had no need for SBA loans. Obviously, you are in a system that works. THAT, sir, is the problem. SBA, by allowing, no - condoning - fraudulent projections, has severely distorted the franchise marketplace. Systems that can not get bank loans use SBA funding to not only continue their scams, but also use their "affiliation" with the SBA as a sales tool to show they are solid businesses. Without the SBA's complicity, there would be a significant reduction in franchise fraud because the weak systems could not get funding.

Now, the SBA has lowered their loan requirements for their new 90% loan guarantee. So, they have increased the amount of money the taxpayer will be on the hook for, they have increased the profitability of the banks by giving them a sure thing, totally riskless loan structure, and they have now given carte blanche for franchise schemes to proliferate because, it appears that according to Dan O'Rourke (Asst. Insp. Gen'l for Investigations) and Aaron Collins (Special Agent in Charge, Eastern Region) it is OK to lie about your projections on the SBA application (the most important part of the loan application) because "projections are just projections".

The U.S. federal government, thru the SBA and SBA OIG's office, is now complicit in franchise loan fraud in the hundreds of millions of dollars - if not more - bankrupting tens of thousands of middle class franchise buyers over the years. These bad systems would not exist were it not for either the incompetence of or complicity of the SBA in this loan scam.

May 23, 2010 - 21:36pm

Ubiquity of SBA loans

Bean writes, "You don't have to go SBA if you have a good plan to show your lender."

Multi-unit and single unit franchise owners would be derelict in their duties if they did not consider SBA loans. Why?

Lower cost of capital. Lower down. More available capital. Better cash flow. In short, many sophisticated investors balanced their investment with SBA-backed loans for good reason.

I'm surprised there are those in here who think that SBA loans were only for high risk buyers. That perception doesn't fit reality. The advantages of these loans are part of the reason why nearly 20% of all loans in franchising were SBA-backed. Now, during hard times, 30% are. These aren't some fringe loans that only a few hard luck bums receive. Franchising is addicted to this government juice for good reason.

Small business?

Not so much.

May 24, 2010 - 03:45am

Ubiquitous guaranteed small business loans

I cannot see that an SBA loan wouldn’t be a smart option for some investors. My initial reaction to such programs was that it was a positive for the reasons Darnelle mentions.

I can also appreciate why banks prefer to encourage franchisees toward SBA loans. These programs obviously work better for banks than conventional loans. But the performance of the program must be questionable in consideration of its lousy economic return and the much higher failure rate.

These aren't some fringe loans that only a few hard luck bums receive.

There would probably be those that do fit that description and that might, in part, explain the much higher failure rates pointing to ‘wonky’ franchise investments further supporting the allegations of manipulated SBA loan applications. I don’t doubt that SBA loans, and similar, can be utilized to effect by sophisticated investors.

But don’t forget; if ‘hard luck bums’ were part of the issue then that would also comes back, in part, to the franchisors selection of franchisees [indicating fringe and wonky investments]; possibly in this context because a convenient fall back is the ubiquity of SBA loan approvals; and that still doesn’t answer the question of how these applications are approved to such a level as to produce such an outstanding failure record.

Is there any data anywhere indicating SBA failure rates by brand? Is it the old 80/20 rule?

FuwaFuwaUsagi

May 24, 2010 - 12:15pm

the SBA is evil

Granville Bean is correct, you do not need to go to the SBA if your concept is worth a darn. Investors are awash in cash. Darnelle is right in that you should consider SBA financing if money is your sole motivation.

Consider however that the SBA basically has caused abnormally low interest rates, which has pushed investors to take on more risk than they should because they can no longer get market based returns for the risk ensued. Further more the SBA has essentially propped up an unsustainable multiplier on commercial real estate, forcing rents to the point where many ventures that should be viable are not. the SBA has empowered legions of minimally qualified operators into the market, luring away enough customers form qualified responsible operators to potentially cause failure. The SBA loan program has distorted economies of scale and pitted the honest businessman against flim-flammers who use the rules under which SBA loans are made to gain an unfair business advantage.

I remain convinced the SBA is another evil Government entity that should be abolished.

May 24, 2010 - 12:37pm

Evil is the wrong word. There is a price to pay for a "free"

market. The government is a pump primer. That is a political matter, not one of propriety or rectitude.

Given that the government money pump provides opportunities, they come at a cost - like everything else. It will never be in perfect balance so that everything reflects value more than opportunism. If we were to exert that much control, the market would no longer be "free".

The fact is that the money is hard to resist. I don't know anyone - and I don't think I would want to represent anyone - who would refuse money on grounds of disagreement with public policy.

Only those who are not in the market for the money stand up to criticize the program. Those who want the money like that it is available on less expensive terms. Many of them also know that if their deal goes bad the government won't come after them personally for repayment except under very unusual circumstances.

And you thought affirmative action was only for underprivileged minorities?

Old Sword

May 24, 2010 - 12:50pm

Re: Evil is the wrong word

Richard, I guess I had better inform all my fellow franchisees that were forced to declare bankruptcy due to their SBA loan defaults that it was only in their imagination that the SBA lender banks came after them with guns blazing refusing to take liens off their homes or accepting a renegotiated amount. I'll let them know that you know for a fact that "the government won't come after them personally for repayment except under very unusual circumstances."

I had better stop payment on my check to my attorney as well since the paperwork I received from the lender bank must have been a mirage.

Lastly, I love the term "free market". When one group holds significantly more power than another they become able to distort and lie with no real consequence. Which is exactly what we see today from franchising. In your world it is OK because nothing will change except the names of those you represent. The situation itself, however, will not get better. There are times, when the "free market" playing field becomes so lopsided that there is a monopoly on the rules and there is no protection from it that someone, in this case the government, does need to step in to reclaim order.

May 24, 2010 - 13:01pm

Free markets and screw ups

Governments screw up all the time and sometimes they fix their screw ups. A free market should not be reliant on tax payers feeding bank profits unnecessarily and with failure rates that would be unacceptable almost anywhere else but in franchising.

Cultivating an aura of confidence where confidence should not exist is not a function of government. I cannot see any justification for these schemes where funding could be better utilized to promote economic contribution, including lower unemployment, by at least tightening controls to best ensure that such funding is focused on investments with potential.

That type of an approach enhances a free market.

A: Honest.

FuwaFuwaUsagi

May 24, 2010 - 16:29pm

The government is a pump

The government is a pump primer. That is a political matter, not one of propriety or rectitude.

I'd be more comfortable with that statement if you stated the Government fancies itself as a pump primer. The trouble is the law of unintended consequences. Creating artificial demand for store fronts is only one. A couple of others would be the simulative effect, which lead to the induction of a large number of illegal aliens to fill the labor vacuum left in the wake of the commercial strip building boom, and the defacto lowering of wages in that industry by the presence of said aliens, the strain on the social service network of immigrant communities, and the large rise in rental values further feeding the real estate boom on the residential side. My point here is that Government policies are very seldom thought thru beyond, as Richard alludes to, the immediate political leverage gained.

The fact is that the money is hard to resist. I don't know anyone - and I don't think I would want to represent anyone - who would refuse money on grounds of disagreement with public policy.

There are principled business men out there. And if you love your country you stand for something or you stand for nothing. Take a look at our Founding Fathers for instance. Fortunes were knowingly lost.

Only those who are not in the market for the money stand up to criticize the program.

Not true at all; Over the years I started several concepts and I would not touch an SBA loan as a matter of principle. Here is where I think we differ. I believe that is entirely possible for a man to pull himself up by his bootstraps, it is possible to get ahead without having to sell out your principles. It may not be the most logical or financially expedient course of action, but principles seldom have anything to do with logic and by far more with heart.

Why would any man want to build an empire, knowingly on the backs of his fellow man? That is what an SBA loan does. It is a handout, charity, a subsidy and it deprives the loaners of capital of a fair and equitable market return and punishes those who do not use the subsidy.

Old Sword

May 24, 2010 - 12:38pm

Re: the evil SBA

I am cautiously optimistic regarding your post. However, I am treading lightly because I don't know if you are being facetious or honest.

However, I will say I had a conversation with Don not too long ago regarding this very same topic. SBA lending distorts the marketplace not only with franchising, but, by increasing the numbers of franchisees out there that need a "storefront" to conduct business, they also helped distort the very need for commercial real estate. The rate of default has significantly increased over the last two years thereby decreasing the need for commercial real estate space and increasing the number of strip malls, etc. that are in now experiencing severe negative cash flow.

There are a number of reasons for the increase in franchise default rates. The least of which is the economy.

FuwaFuwaUsagi

May 24, 2010 - 15:27pm

a "storefront" to conduct

a "storefront" to conduct business, they also helped distort the very need for commercial real estate.

It was a sincere commnet. You can probably search on my name and find 3 or 4 posts on the same topic made couple of years back.

And you have it exactly right(as indicated above). That is a part of what I meant. The SBA is propping up a market and the distortions are not only not right but have created economic disallocations.

May 25, 2010 - 13:50pm

SBA and CSBFA

Don’t forget that the Canadian variation produces similarly lousy outcomes. If the Canadians and the Americans can’t get it right than there is little hope for the overall performance of government guaranteed small business loans in any country. But I have a stupid question.

Would better approval processes make these programs work or are they too corrupted to ever be worthwhile?

May 25, 2010 - 13:55pm

Answer to stupid question:

It isn't a stupid question.

All certification programs are bogus.

An official certifying agency issued a drilling permit to British Petroleum, certifying that BP met all the requirements for competent safe deep water drilling in the Gulf of Mexico.

For further answer:

BP and the Gulf of Mexico represent another example of why it is absurd to think that the government can solve problems.

Only people can solve their own problems through their own actions!! Remember. You heard it here first!

Old Sword

May 25, 2010 - 14:41pm

Re: Answer to stupid question or just a stupid answer?

Actually, Richard, there are questions regarding whether the blowback safety portion of this well was built correctly.

Regardless, what you are completely missing is the fact that BP is being held accountable. Under your scenario, the citizens of the Gulf would be responsible. Yes, their livelihoods are at stake, but BP is, and will be, paying for the cleanup and it is still being determined if BP will be forced to pay remuneration for the loss of careers.

And franchising/SBA? Little to no real regulation. Carte blanche to provide misleading information and ruin franchisees financial lives. With BP, when was the last oil catastrophe? How frequent are the problems? Most important, could any reasonable person claim that it was very likely that this particular well would have blown up given the history of gulf oil drilling? Now, ask those same questions and insert Franchising.

Stop the crap about regulations aren't needed. Will they stop fraud? No, just like the death penalty doesn't stop murder. However, with murder there are ramifications. Franchising? There is no one to stop them and, most important, there is no reason for franchisors to stop. They just collect the money and laugh all the way to the bank. When one party has substantially more power than the other there is bound to be a perversion of the law. Power corrupts. Absolute power corrupts absolutely.

May 25, 2010 - 14:47pm

If you think that BP is being held accountable, you need to get

some new meds. Tell me about BP being held accountable next year, old sport.

May 25, 2010 - 15:17pm

BP & SBA

When even good intentions are susceptible to corruption the end result will be corruption. Now there is talk of possible prosecutions of oil rig inspectors involved in corruption [bribes to look the other way] and just maybe some mid-size heads will roll as well.

The core culture at the top of the ‘efficient’ money tree will not be dealt with. In franchising and in this instance, SBA and CSBFA, the issue is that it was open to manipulation and therefore it was destined to be corrupted. The absurd part is that corruption is denied. ‘Nah, the gubbermint and da banks wouldn’t operate a hush-hush agenda’.

I don’t think it’s absurd to think government can solve problems; but it sure is absurd to expect government to solve problems when solutions go against the wishes of the money tree. But how often would that happen?

Old Sword

May 25, 2010 - 15:21pm

Re: If you think BP is being held accountable

Richard, your argument has frequently been that additional laws will do nothing; just as laws against murder don't stop murder. But, actually, they do. Laws may not stop the first murder but the law immediately goes after that person so they don't do it again. However, according to your thought process (I'm giving you the benefit of the doubt on that one), why bother with laws against murder? It doesn't stop them so why bother, right?. Let's allow serial murderers to continue on ad infinitem because the law didn't stop them in the first place.

Franchisors, in many instances, are serial (financial) offenders who are allowed to perpetuate fraud. There are few laws prohibiting their practices of deceit and obfuscation. Real regulation would prevent this or, at the very least , stop it in the long run (as of now franchisors have been having fun for decades). More effective laws will put a severe dent in the continuation of these frauds.

However, having had more time to reflect on this issue, maybe, Richard, you are correct. Maybe pulling all laws that criminalize murder is the way to go. If this were the case, I think I would be willing to bet there would be far fewer franchise frauds committed. (aka, Texas justice)

May 25, 2010 - 16:32pm

The laws against murder deter those who don't really want to

murder anyone. Those who really want to do that are not deterred. It is the same with all laws.

When I was young, a teacher once told me that locks were not to prevent crooks from stealing things. They were to remind honest people not to disturb what was locked within.

You can lick your wounds all you like. Or you can think about turning all this pent up energy into making a life for yourself.

If you left where you now live and came to Houston, you would be on the road to financial recovery within a year. We have had this discussion in person. You can't duplicate the opportunities of Houston by staying where you are. But you have to have the courage to make the first step. Shut up and do something for yourself.

May 24, 2010 - 04:06am

Finally Beanie

You support at least one point being made for and by franchisees. They will be shell shocked but once revived you will have adoring believers stating you aren't that big of a snob. I've heard about this coming out business ...

Old Sword

May 24, 2010 - 14:47pm

Re: so much SBA

Now, the SBA has lowered their loan requirements for their new 90% loan guarantee. So, they have increased taxpayer liabilities, they have increased the profitability of the banks by giving them a sure thing/totally riskless loan structure, and they have now given carte blanche for franchise scams to proliferate because, it appears that according to Dan O'Rourke (Asst. Insp. Gen'l for Investigations) and Aaron Collins (Special Agent in Charge, Eastern Region) it is OK to lie about your projections on the SBA application (the most important part of the loan application) because "projections are just projections".

The U.S. federal government, thru the SBA and SBA OIG's office, are now fully informed as to how this scheme works and have put the scheme into overdrive by allowing a lower threshold for loan approval. If banks will not lend their own money to purchase a franchise system but will if it is taxpayer guaranteed - what does that tell you about the financial viability of the system? Most important, what does that tell you about the banks' knowledge of these systems?

June 1, 2010 - 18:27pm

The SBA spin begins in Aus

SmartCompany reports SBA as a windfall for small business. It is an election year.

Generous SBA and US taxpayers