IFA's New Senate Ammendment; Is It Worth The Expense?

July 14th, 2010

The IFA is urging the Senate to include an ammendment to new SBA legislation in an attempt to increase the size of SBA 7a and 504 loans. The IFA admits in its press release that "Nearly half of IFA members. . .indicated that access to capital is the most pressing issue they face in 2010.,. . .so that more franchise business owners can obtain the necessary start-up capital..."

With half of the IFA's members unable to get approval for regular bank loans for franchise start ups and, instead, need a 90% guarantee from the SBA for the banks to consider providing the loans begs the question 'What is the true financial viability of these systems'?

As for jobs, it would be interesting to see what percentage of 'franchise jobs' pay around minimum wage. Yes, they may help in lowering a headline unemployment rate number, but what is their impact in creating a liveable income for the employee?

for every incremental $1 billion in lending, franchised businesses can create 40,400 jobs — Franchising.com

With the increase in outsourcing and the increase of franchise jobs over the last 15+ years, is this the future of America's employment growth?

July 17, 2010 - 11:47am

Oldsaw is anti-franchisee socialist snob

You don't want franchisees to get loans to start their businesses. You denigrate the entry level to management jobs franchisees create.

July 17, 2010 - 13:13pm

Guest is a bleeding heart socialist

Guest wants the federal government involved in giving handouts to franchisees because their business does not qualify for private sector loans (conventional).

In short, our guest is a bleeding heart socialist who wants the state to succor small business. We need to rely on market forces and capitalism and not use tax dollars to buoy up the franchise sector.

PinkoGuest is confused on the differences between capitalism and socialism. I suspect he is calling capitalists socialists in order to line his own franchisor pockets. Now that's tricky.

July 17, 2010 - 14:32pm

Oldsword recklessly distorts the truth

Au contraire mon frere Mr. Oldsword is an anti-capitalist as he constructs a self-serving false premise.

Oldsword's intent seems to be to create an government/banking/regulation environment whereby franchising activity is curtailed. He has no interest in creating free markets, but certainly wants increased government intervention and while it is unfortunate that SBA lending exists - it exists because of government control of the banking industry. If you have free market capitalism in banking you don't need the SBA.

But let's not pretend that Oldsword is for less government regulation, sane lending practices, free market capitalism and franchise expansion.

Old Sword

July 17, 2010 - 15:12pm

Re: the truth about SBA financing

Guest, apparently you are unable to grasp the technical aspects of my argument:

1. SBA "Fast Track" approval is used by franchisors as a selling point claiming the SBA wouldn't write loans to a system if it didn't have a proven track record.

2. SBA, being a typical government entity, provides little oversight. By allowing any "projection" to be thrown onto a loan, it enables fraudulent systems to obtain financing.

3. If banks were forced to take more risk in the loan they would require proof of financial viability. You know guest, historical data.

4. Obviously, banks refuse to provide non-guaranteed (or heavily collateralized) loans to franchises. If the system truly generated the profits they claim then it would be easily proven - THROUGH HISTORICAL DATA.

5. By allowing loans to go thru with little financial substantiation, the SBA keeps afloat franchise systems that do not work - these "systems" are able to sustain themselves thru sales financed by fraudulently obtained loans thru the SBA.

6. Few government regulations would be needed if the SBA did not provide franchise financing. Each system would have to PROVE their financial viability. Historical data is easily obtained with franchises. This would save not only the taxpayer from fraud but the franchisee as well.

7. Bad systems would cease to exist because they would be unable to find financing. (something, being an upstanding individual, guest, you should be in favor of).

Thus far, guest, it is you who appears to be losing the argument on every front. You want faulty systems to blindly be provided government financing because, hey, its a franchise. My argument is simple: If a franchise is supposed to be a "proven, successful business model" then, simply, PROVE IT!!

July 17, 2010 - 19:05pm

Oldsaw's same old dishonest rhetoric

Oldsaw SBA doesn't make the loan, banks make loans with SBA guarantees with borrowers paying points into guarantee pool to cover bad loans. Bankers should utilise sound and reasonable lending protocols. Many lenders already ask franchisors for supporting historical financial information before deciding on a loan.

But all this matters little to you since your objective is to promote your anti-franchising agenda. Let's face it Oldsaw you're not here on BMM to promote franchising best practices you're here to do everything you can to destroy franchising.

July 17, 2010 - 20:47pm

Oldsword, perhaps

you should write something on 'franchising best practices'. I can think of a few.

Old Sword

July 18, 2010 - 10:20am

Guest's rhetoric - never any proof

Bankers should utilise sound and reasonable lending protocols. - Guest

Guest, comprehension is the key to learning. I have stated many times that good systems exist. I do believe that most systems are not financially viable. However, we both (somewhat) agree on your above statement. My question to you is: How would you define "reasonable"?

1. If the average first year franchisee's gross revenue is $250,000, should the bank allow $500,000+ on the projections? Three points to this one:

A. This was done in my system. The SBA OIG confirmed that every SBA loan (over 120) between 2006/2007 had this inflated gross projection. Also confirmed? Lowering projections by just 5% would have guaranteed rejection. To simplify this, the only way these loans received approval is through doubling the actual average.

B. Less than a dozen first year franchisees ever grossed more than $500,000 in the 20+ year franchise history. For every one franchisee grossing $500,000, 5 franchisees must gross $200,000 to average $250,000. That is 20% BELOW the average for 5 zees to offset the one $500,000 yet every loan had the higher projection.

C. Automatically place every MLB player into the Hall of Fame? To accept "A" as 'reasonable' would suggest you would agree with that methodology. Is it "reasonable" to assume from day one that every player will bat .350 or be a premier pitcher? We all know the great majority do not meet these standards.

D. The banks know the game. Lending "their money"? - that is a farce. They lend "their money" when they assume "the risk". When 75 to 90% of the loan is guaranteed the banks look the other way. And yes, the government is paying out the money because these "fees" you claim, are not covering the losses.

2. Lets use Quiznos. One of the largest franchisors. Major loan defaults. Huge failures. Still receiving SBA guarantees. How? Projections! Not the zees name or address or SS#. Inflated projections show profitability. Do you want to argue Quiznos profitability, Guest?

These are your "best practices"? "Proven, successful business models". Franchisors want gov't funding? Provide avg first year gross and avg first year expenses. Open the books. They know the numbers. BTW, the banks know as well - which is why they won't lend to most franchises w/out SBA gtees or excessive collateral.

July 18, 2010 - 11:16am

Oldsaw so it is all about you after-all!

BMM is your forum to exact your revenge against your un-named franchisor.

I guess you're right for the past 30 years or more the IFA, the SBA and lenders have artificially propped up franchising. Franchising is a house of cards. Franchising is a pox on society, it's a commercial disease.

July 18, 2010 - 11:19am

How hard was that

You finally get it ...

July 18, 2010 - 11:52am

Ray at least -

you have a sense of humor. All Oldsaw has is a sharpening wheel for his ax collection.

Old Sword

July 18, 2010 - 12:33pm

Guest's difficulties with comprehension

Think for a change before you write. My system was an example. This is done in hundreds of systems. Tell me, Einstein, how does a franchise system, that shows large SBA loan defaults, continue to obtain SBA financing? Not the zees name or SS#, nor the region in which they live. SBA loans are ONLY approved if you show you can pay back the loan thru the cash flow of the business and ONLY WHEN you meet a minimum debt coverage ratio. With large default rates there is no way the average gross (or net) of these zees is anywhere close to the needed revenues. (Quiznos, remember? - and thats just a start)

You have claimed in the past to want to rid franchising of bad systems. Yet, all you do here is espouse "free money" to go to every franchise system with little to no proof of the true profitability of the system. As I said in my last post (comprehension skills, guest), there are some good systems. It is the bad ones I attack.

BTW, you might want to reread all the other posts from this thread. The only one unable to grasp the magnitude of the situation appears to be you.

July 18, 2010 - 13:09pm

Oldsaw is a stranger with the truth

You have only first-hand experience with your un-named franchise and your vicarious knowledge of Quizno's.

You are also admitting you were complicit in providing false projections to your lender for an SBA guaranteed loan. Did your loan get repaid in full?

Old Sword

July 19, 2010 - 15:24pm

Guest the truth shall set you free.

Your typical ignorant, jack-a-s response. As mentioned I brought this to the SBA's attention and proved EVERY LOAN in my system had the same numbers. SBA admits many other systems showing the same situation. (not just Quiznos, just look at the SBA's default list - how the hell do you think those systems keep getting SBA loan approvals? Simply, false projections that bare no semblence to reality - the reality showing the high default rates).

1. Instead of working to rid franchising of bad systems (which you have admitted exists in a previous post) you attempt to "brilliantly" redirect the conversation.

2. What is "complicit" is franchise systems who clearly show significant failure rates having new zees provide inflated projections on the loan application. Projections that the zors historical data prove is nowhere near reality.

3. New franchisors need to prove the success of their system. To begin with: several corporate owned sites (that can show first year results that would meet SBA requirements). Or, if the zor wants to sell earlier, they need to find buyers who can finance without the SBA.

#3 is very easy to understand. Why should the government put up taxpayer guarantees for a system that is not "proven". You know guest, the "proven, successful business model". If you want to rid the system of frauds why would you agree to sell a system that is not "proven" to be "successful"? Unless, of course, the sale (and commission) is more important.

July 19, 2010 - 20:29pm

Oldsaw what about your complicity?

You took an SBA loan and you provided false projections.

Old Sword

July 19, 2010 - 21:12pm

Guest, your ineptitude is laughable

Your ignorance is overwhelming. As mentioned numerous times: I was the one who told the SBA about my loan and the fraud. They, in turn investigated and pulled all 120+ SBA loans - just in my system in a two year period - and finally realized my allegations about an extensive fraud was correct. They also reviewed other high defaulting programs and found the same. They are fully aware there is no "complicity" on my part, just a franchisor who sent most of their buyers to the same loan consultant who just happened to use the same fraudulent numbers for everyone. (Cuppy's Coffee, Hollywood Tans, and so many more doing the same thing - I believe this is what you mean by your "proven, successful business model")

Two things:

1. They came to realize this is how your great "franchise" programs sell their wares. With the fraud at the very beginning of the sale (and guaranteeing financing for the sale) the new unsuspecting franchisee is now locked in.

2. Your comments haven't won a single convert to your cause. They just allow me to respond and provide further details as to the scheme thereby educating more about how the SBA fraud occurs. Your attempts at changing the argument are laughable at best and only prove to the readers, time and time again, of your inability to argue against the facts.

Please, keep'em coming.

July 19, 2010 - 22:35pm

Oldsaw don't be so sure

BMM is decidedly a site for malcontented current and former franchisees so I wouldn't expect your audience to come to my aid. You signed off on your pro forma that was provided to your lender, you must have believed the numbers and you did want the loan, right?

Now you can continue being unhinged and call me names, however that doesn't answer my questions or make you right.

July 19, 2010 - 23:10pm

Complicity and Fraud

Guest writes: " You signed off on your pro forma that was provided to your lender, you must have believed the numbers and you did want the loan, right?"

Let us suppose this was true.

Now both the franchisor, franchisee and SBA loan preparer are conspiring to commit fraud. One of the conspirators decides to spill the beans - but guest complains about this.

Why, I wonder?

July 19, 2010 - 23:55pm

Re: Complicity and Fraud

Mr. Webster, Oldsaw's tale of woe is disingenuous and self-serving at best. I'm not saying that unscrupulous loan packagers and franchisors have not committed SBA loan fraud and earnings claim violations. But I don't think you want the SBA to eliminate 7A and 504 loans to your IAFD members as Oldsaw seems to be advocating. Oldsaw lost money on his failed franchise venture and wants his pound of flesh at any cost. Do you want your IAFD constituency to have access to development capital via SBA loans?

July 20, 2010 - 03:57am

Yes! Why? Guest gets 10 for

Yes! Why? Guest gets 10 for persistance and zero for substance. His comments never add to the topic. He merely attacks Oldsword and I have to wonder why again? Why is he protective of the SBA fraud element?

And while we are at it; we know why Oldsword must protect his identity but we have not been given a reason why Guest protects his. Perhaps his identity or his association with SBA loans is the answer to all questions.

But there is one alternative reasoning. Guest might well be a supporter of Oldsword and is simply provoking all this wonderful information to feed the thread so very wonderfully. Oldsword did you enlist your neighbour you sneaky old bastard?

No matter why, I would suggest we all be upstanding and salute Guest. Thank you Guest. You are indeed ... WONDERFUL ...... or really, really thick.

Old Sword

July 19, 2010 - 23:48pm

I'm sure - and the SBA OIG's office verified it

Unhinged? If you mean laughing uncontrollably at your comments, then, yes.

Believed the numbers? Yes, the loan consultant's numbers fell right in line with what the zor's saleperson "whispered". Not only to me but to others. Want the loan? Are you nuts? If anyone one of us knew the REAL numbers showed a loss of over 6 figures we would not have signed on. Who the hell would have signed away their home knowing that the chances of losing 6 figures was in the 80+% range.

Get over yourself. How many franchise sales would occur if franchisors provided the real numbers? Would Cuppy's zees have signed on knowing the real losses? Coffee Beanery? Think Quiznos' real first year averages are anywhere close to being profitable - or profitable enough to qualify for the loans? Blimpie? Cold Stone Creamery? Hollywood Tans? The list is several hundred long.

Your questions have been answered many multiple times. (except the name of my franchisor - which should prove that I am NOT trying to trash my zor - NO ONE knows who the hell it is!!) You are pretrified of real financial disclosure because franchise sales would dry up. The last thing you appear to want is for franchisees to know the real numbers.

I admit there are franchise systems that work. Time for you to admit that getting rid of bad franchisors is good for everyone.

July 20, 2010 - 00:01am

Re: I'm sure - and the SBA OIG's office verified it

Did the SBA file criminal and/or civil fraud and conspiracy to commit fraud charges against these offending franchisors and loan packagers? I would be in favor of it. But your goal is not to bring the penalty of justice to bad apples is it?

July 19, 2010 - 21:25pm

Complicity

Guest writes: "You took an SBA loan and you provided false projections."

Uh, the problem here is, as has been well documented, that SBA loan "preparers" get illegal item 19 claims from the franchisor, pass them on to the lender, and don't let the franchisee see them until the loan is approved.

Apparently, the IFA wants more of this to happen.

July 19, 2010 - 22:34pm

Re: Complicity

We both don't know what happened in Oldsaw's loan application. We only know what Oldsaw has posted. We don't even know what franchise he owned.

Unless of course you know more?

July 19, 2010 - 23:07pm

Complicity Again

I don't care about Oldsword's individual problem: I only care about systemic fraud. And if you have been reading here, you would understand the systemic fraud committed by some SBA loan brokers. Please read up on the subject before posting any more. Thanks.

July 20, 2010 - 09:28am

Worse yet - It is reported this morning that the poor are now

buying cigs and beer with their government relief money - The Shame of it!

Tis the poor who must be watched. When you add up all the cigs and beer that we have bought the poor, you can see that fraud is rampant in America. And it all started with franchise loan brokers.

Left unchecked, this can only lead to under reporting and short remits by nefarious franchisees plotting against honest franchisors who are helping them through these difficult times. More's the shame of it!

July 20, 2010 - 11:32am

The unpoor apparently vote

The unpoor apparently vote where apparently the poor should eat cake. If the poor bothered to vote they could lobby for free cardboard from the unpoor and the world would be a better place. But the equal opportunity don’t vote and whose fault is that. They just loll around outside McDs. The shame of it.

September 4, 2010 - 22:09pm

It just works that way Oldsword

In fact, close to a third of the best-paid candidates were investment bankers, some of them so obscure they are barely mentioned in annual reports or the media. The Australian

Apparently anti-capitalism is close to being a registered disease. However, in some areas of competition large parts of both government and the public call for the dismantling of 'every day' supermarket 'cartels'.

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July 17, 2010 - 16:01pm

Milton has lost his way

Milton, Milton. My brilliant buddy. My famous friend...

Think hard to what you once wisely uttered while in your mortal tabernacle: "If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."

Most of us are now having a hard time following you on why the SBA must exist because of "government control of the banking industry." Not sure what you mean.

You also once said, "There ain't no such thing as a free lunch." Man, I wish I would have said that. You were so right. SBA guaranteed loans come at a costly price in distorting the lending market. Where it is cheaper for SBA-back loan recipients, it is more costly to those who don't take out such loans to fund their businesses. SBA-backed loans are pushing money into small businesses that would not normally qualify for loans. There is also a lack of accountability among the lenders.

I think all of that communal living and sharing in Heaven has softened your thinking. Come down to where it's warmer. It will clear your head.

July 17, 2010 - 16:16pm

I would suggest bank control

I would suggest bank control of government is closer to the mark than ‘government control of the banking industry’. To suggest otherwise is akin to ‘the world is flat’. Or; ‘damn this is good dope’.

FuwaFuwaUsagi

July 17, 2010 - 14:24pm

SBA makes Darth Vader look wholesome

Perhaps Oldsword is objecting to have the Government subsidizing loans to concepts that could not pass the scrutiny for risk-return from professionals using either their own money or have a fiduciary responsibility to protect the capital of others.

Not only does this artificially lower interest rates in the overall marketplace but it introduces Government subsidized competition against taxpayers who fund their own concept with their own money or against the very banks who hold loans on small businesses in their own portfolio.

This would be in addition to the artificial increase in prices that results in the marketplace for supplies and rental space for retail establishments.

Additionally this perpetuates the idea that the government is the cure for all problems. Remember the Government can only do anything by depriving others of the just fruits of their honest labor under the auspice of use of force or imprisonment.

In summary, the SBA:

1) Derives the investor class or a market based return for the risk ensued in a business venture

2) Artificially creates a surplus demand for retail space that increase rent and thus decreases return

3) Artificially creates demand for supplies driving up the cost of goods sold, thus decreasing profitability

4) Introduces an artificial level of competition and puts the Government subsidized in direct competition with private sector businesses

5) Creates moral hazard in terms of the role of Government

July 17, 2010 - 15:49pm

SBA; warm and friendly

Just as the franchising model has been distorted so has the original and probably naïve intent of SBA loans been distorted by banks and in particular; franchising.

I would have thought that governments should weight public benefit against public detriment and that should be the core of the debate to restrict SBA loans. There are obviously individuals who benefit from SBA loans but to what degree does that justify the hyena and phoenix activity that undermines public benefit in suggesting that unworthy investments are worthy. On that basis SBA would be a windfall for most franchisors and they fit snugly in with the rest of the industry illusion.

Fuwa points to why SBA loans mostly exist and that is a condemnation of not just SBA but of alternate government intervention for all the wrong reasons.