Small Business Administration Franchise Loan Transparency Act of 2017

Franchise businesses represent a large and growing segment of the retail and service businesses of the United States and are rapidly replacing more traditional forms of small business ownership in the economy of the United States.

The Small Business Administration (“SBA”) guarantees much of the financing available in franchising.

The SBA requires pro forma projections, including projected revenue, for the first year of operations of a franchise as part of the standard operating requirements for a franchisee to qualify for financing.

On July 13, 2011, the SBA Office of Inspector General published an audit (Report No. 11–16) on loans made under section 7(a) of the Small Business Act to Huntington Learning Center franchises where first year revenue projections were all significantly inflated.

On July 2, 2013, the SBA Office of Inspector General published an audit evaluation (Report No. 13–17) showing that the SBA needed to improve the management of its 7(a) loan portfolio risk, specifically with certain franchise brands that had exceptionally high default rates that continued to receive guaranteed loans from the SBA.

In September 2013, the Government Accountability Office published a study (GAO–13–759) showing that over the 10-year period from 2003 to 2012, 28 percent of 7(a) loans to franchises required a guarantee payment. The study was based on 32,323 loans totaling $10.6 billion, which required $1.5 billion in guarantee payments. The report specifically stated, “Potential franchisees should include first-year revenue estimates in their SBA loan applications. However, this information is not necessarily available to potential franchisees in the franchise organization’s disclosure document.”.

Franchise companies most often collect royalties based on gross revenue; therefore, revenue data on each franchise outlet are readily available.

While both the franchisor and the lender profit as a result of the SBA financing, only the franchisee bears the total liability for the loan.

ensure transparency in the loan processes of the Small Business Administration, so that the franchisee borrower, the lender, and the Administration all have access to information that is key to the lending process;

remove any hidden discussions between the franchisor and the lender on financial data critical to the loan approval process;

lower the fees and rates charged to franchisee borrowers; and

help ensure lower default rates in order to make more money available for loans.

The average first-year revenue for all franchise locations for each of the preceding five years of operation.

The number of franchise locations that went out of business or were sold by the franchisee during the first year of operation for each of the preceding five years.

Average revenues for all locations of the franchise for each of the preceding five years of operation, aggregated to show the top 25 percent, middle 50 percent, and the bottom 25 percent of revenue.