Photo by Jon Springer
Two US senators are asking whether the US Small Business Administration should forgive loans granted to franchisees in schemes later cited for unfair or deceptive practices in courting operators.
U.S. Senator Catherine Cortez Masto, a Nevada Democrat, and Elizabeth Warren, a Massachusetts Democrat, earlier this week asked SBA Administrator Isabel Guzman for detailed information about the SBA’s process for processing loans to franchise brand operators .
Schemes cited in their letter include Burgerim, the California-based fast-casual burger brand that has been fined $4 million by the state of California and ordered to reimburse fees and other costs incurred by more than 1,500 worn by people signing up for a franchise. The US Federal Trade Commission has also sued the franchisor, the first such lawsuit in more than a decade.
That follows a 2020 investigation into the restaurant business into the brand, whose founder Oren Loni abandoned the concept and apparently fled the country. More than 100 brand franchisees were approved for SBA loans before the agency stopped approving loans to operators in the system.
For more on Burgerim and the aftermath of the franchise’s collapse, see The Fall of Burgerim.
The measures, along with a 2021 report by Cortez Masto on strategies to prevent fraudulent practices among franchisors, “continue to demonstrate the need for greater disclosure of the risks of investing in certain franchise brands and for increased SBA oversight of its guaranteed loans to franchisees.” . ‘ the senators wrote.
A representative from the SBA confirmed that the agency had received the letter, but made no further comment.
The letter continues mounting pressure at the federal level to take more aggressive steps to regulate franchises and prevent some of the wide-ranging problems that have put numerous investors out of business.
The FTC, which regulates franchising, agreed to take more steps than it’s traditionally taken to crack down on bad franchisors — and then filed its lawsuit against Burgerim.
However, some of these efforts are aimed at the SBA, which supports lending to small businesses that would otherwise be unable to obtain lending through traditional channels. Some franchise advocates believe the agency isn’t going far enough to prevent lending in systems where many franchisees have gone out of business.
Franchise industry experts, on the other hand, argue that there is a lot of information available for franchisees to avoid such problems.
US Senators are backing two bills introduced by Cortez Masto that would require the SBA to increase the amount of information available about brands whose franchisees receive SBA loans. One would require the agency to release the SBA’s quarterly loan default rates for all franchise brands. Another would require franchisees to disclose financial performance data for all SBA-backed loans.
But the senators also note that such legislation is “not necessary” because the agency can implement the rules now. In fact, it published standard data until it stopped almost a decade ago.
In their letter, Cortez Masto and Warren highlight the Burgerim issue, as well as issues with several other franchises, including Dental Fix, which has settled misrepresentation charges with Virginia and Washington, and Curves, which is just one of 52 franchises in Washington Texas settled the lawsuit.
Some proponents are urging the SBA to make loans to Burgerim franchisees in light of the FTC’s lawsuit and California action. They cite a recent move by the US Department of Education to forgive $71.7 million in loans to DeVry University students, which the commission sued in 2016 for false advertising.
Burgerim franchisees received an estimated $38 million in government-backed loans.
Senators are asking the agency for detailed information about the SBA’s processes when franchisors have found wrongdoing — such as whether the agency reviews the credit process, makes loans to franchisees, or shares information with other agencies such as the FTC in such cases.
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