Do not assume the SBA franchise directory is any indication of quality! Many SBA approved franchises have failed and highly established franchises actually fail at only about 2% less than emerging brands!
Before we begin – yes, the SBA financing program is a great thing if you need money to start your franchise. The SBA is a governmental department that among other things helps entrepreneurs obtain financing by guaranteeing the loan. Many people think the SBA actually does the lending – not true. Approved banks do the lending but the loan is being guaranteed by the SBA. Obviously this makes it easier for banks to lend you money knowing that the government will repay part of the loan, up to about 85% if your franchise fails. Recently they created the SBA franchise directory to provide a list of franchise brands that have been reviewed by and are eligible for SBA assistance.
Now obviously when you approach a bank for a couple of hundred thousand with a traditional loan banks are going to be reluctant to extend funding without substantial equity, guarantees, first born etc. With an SBA loan banks are much more forthcoming with financing knowing the government will pay the money back. The finance groups that we work with all use SBA and this type of funding has made many franchise buyer dreams become a reality.
The problem is however that seemingly people are actually using this search for SBA directory or SBA franchises as a starting point. And I assume they are doing so because it would make sense that the government would only approve really good franchises with really low failure rates to be SBA approved. Sure because the government is always really effective and efficient at everything it does.
The reality is that within the list of SBA approved franchises there are some absolutely terrible franchises. Im using an older list here because we can actually demonstrate over time how badly some of these franchises fared. If you look at the now defunct Wings-N-Things you can see they loaned money on 18 locations and 16 of those didn’t pay back the loan. So almost a 90% chance of failure. Noble Roman Pizza also at an almost 90% default rate. Now I’m not saying that SBA defaults are the end of the world because there is often more to the story, but when people begin their search by actually looking for SBA approved franchises assuming they must all be good, that is a recipe for disaster. As you can see here we are only looking at the first 15 locations and we are reaching just below a 70% failure rate. So I hope you see that searching for SBA approved franchises is absolutely no guarantee of success and the government does in no real way pre-qualify the franchises it brings into the list other than how many locations they have and how long in business.
Now I appreciate that for financial reasons people only want to deal with SBA franchises – thats great. But the SBA directory does not show you anything about these franchises. And if you follow the channel you know that people left on their own will often make terrible buying decisions.
Much more important than being in a SBA list and things you want to consider long before you look at the type of financing are operational comparability – are your skills a match for this franchise and does the franchise operational model fit in with your short and long term business goals. Demographic compatibility – is this franchise a fit for your specific area? Just because it succeeded in another state means nothing. Cultural fit – what is the franchises management and corporate style? Is it in alignment with your own. Exit strategy – are you looking at long term and family succession plan – or to build and resell? Certain franchises are better options for resale. Once you know the important things NOW you can shorten that list to only include SBA approvals but using a random SBA directory to guide your decisions is like throwing darts at a stock chart.
If you do prefer to work with SBA approved franchises Franchise City offers a free service that helps buyers make better decisions you can learn more by clicking the link above. If you are interested in franchising please consider liking and subscribing and viewing some other videos links are here and here. Thank you for watching