Senators Urge More Disclosure of SBA Franchise Loans – Restaurant Business Online | Region & Cash

SAV franchise regulations

Photo by Jon Springer

An attempt to require franchisors to provide more information when receiving government-backed loans appeared to have garnered some major support this week.

U.S. Sen. Ben Cardin, D-Md., chairman of the Senate Committee on Small Business and Entrepreneurship, endorsed two proposals from Sen. Catherine Cortez Masto, D-Nev., that would increase the amount of information for franchise brands to disclose whether they are SBA- get loan.

One would require the agency to report franchise brand default rates on SBA loans each quarter. Another would require such brands to provide more financial information to potential franchisees.

For supporters of the legislation, it would give prospective operators more information to determine the quality of the franchise they wish to invest in. “For many small business owners, franchising has been a path to middle class and financial security,” Cardin said in a statement that opened a hearing on the SBA’s role in franchising. “For many others, opening a franchise has resulted in financial ruin. The model has its risks as a disproportionate amount falls on the franchisee.”

The proposals have their critics, most notably the International Franchise Association, which argues that the bills seek to fill a need that doesn’t exist and that they unfairly target franchisors.

“In our view, requiring a special type of disclosure — only for franchisors — that would add additional data to the (franchise disclosure document) would not be useful or serve a particularly useful purpose to prospective franchisees,” said Matt Haller, CEO of the IFA in a statement for the record submitted to Cardin’s committee. He added that the Federal Trade Commission, which regulates franchises, is a better forum for franchise disclosure than the SBA.

The hearing was also stalled by concerns about inflation and whether the government should support corporate loans at all.

US Senator Rand Paul, a Kentucky Republican and the senior minority member, lamented that the proposed rules would do nothing to ease inflation or balance the budget, cut taxes or repeal laws. He said the proposals would “weaken a successful business model.”

He then argued, “The best way to avoid risk to taxpayers is to stop making them foot the bill for SBA grants and loans.”

Bryan Tipton, owner of Arby franchisee Tipton Investments, argued at the hearing that if a borrower needs SBA-backed financing, “probably is doing something wrong.”

“Taxpayers take on risky business loans,” he said. “The needs of most small business owners can be met in the private credit market.”

The SBA will support lending to small businesses that are struggling to obtain credit from the private market. The agency supported approximately $36.8 billion worth of loans in its 7(a) program and an additional $7.6 billion in the 504 program, the two most popular programs of this type.

Many small businesses cannot start without them, including franchises. “The IFA is very supportive of the SBA loan programs,” said Leanne Strapf, chief operating officer and multi-unit franchise owner of The Cleaning Authority of Columbia, Md., for the association. “These loan programs are essential to helping small businesses get started and giving those who may not have access to capital the opportunity to achieve the American Dream.”

Cortez Masto’s legislation comes in response to a handful of troubles in the franchise sector, particularly at Burgerim, which has signed more than 1,500 franchisees over a three-year period, the vast majority of whom have never been able to do business to open. Most of those who did lost money and many went bankrupt.

The FTC has since sued Burgerim, arguing that the company violated federal disclosure laws when it committed many of the franchisees. The state of California has ordered the company to pay a $4 million fine and refund franchise fees. The actions followed a 2020 investigation by Restaurant Business into problems in the franchise.

The SBA has endorsed more than 100 loans to the franchise, and many argue that the agency should repay those loans in light of FTC and California actions. However, many emphasize that the agency should do more to provide franchisees with information about the investments they are making.

“They absolutely deserve to know what they’re getting into,” said Cortez Masto. “That’s not always like that.”

Robert Emerson, a professor of business law at the University of Florida, said he’s concerned bad franchises will weigh on the business model. He doesn’t think the disclosure proposals would impact franchisors’ costs, since much of that work is already being done. Franchisees, he said, “should have better access to information.”

But Aaron Yelowitz, a senior fellow at the Cato Institute, a conservative think tank, argued that there is a “statistically insignificant” difference in amortization rates for SBA loans made to independent companies or franchises. And he argued that better franchisees would choose brands that offer more information.

“Those who offer transparent products will find takers,” he said. “The private market will solve many of these problems.”

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Author: Amine

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