Small Business Administration Franchise Loans

Risk of Loss Can Be Reduced and Program Effectiveness Improved Gao ID: CED-80-47 April 11, 1980

A review was undertaken of the Small Business Administration's (SBA) franchise loan policies and practices. As of April 1979, SBA had made or guaranteed about 16,400 loans totaling about $1 billion to franchise businesses. However, as of September 1978, the risk of loss by SBA on franchise loans was about $548 million. Moreover, most of SBA franchise business loans have been made under its principal business loan program. The remainder have been made under the SBA Economic Opportunity Loan (EOL) program.

Under the SBA principal business loan program, the 7(a) program, to be eligible for a franchise business loan, a firm must be independently owned and operated and meet the small business size standard that SBA established for the firm's industry. The three types of loans made under the 7(a) program are guaranteed, immediate participation, and direct loans. Guaranteed loans account for about 64 percent of the loans made under the 7(a) program. Furthermore, according to SBA procedures, EOL's are restricted to low-income individuals or persons who, due to social or economic disadvantage, have been denied the opportunity to acquire adequate business financing through normal leading channels on reasonable terms. GAO believes that the SBA franchise guidelines are adequate to ensure loan payment. However, its practices and procedures were not always followed. Moreover, although SBA provides some information, counseling, and management assistance to franchise borrowers, improvement is needed to ensure loan payment. Further, SBA field visits, a necessity in identifying borrower financial difficulties and determining whether management assistance is needed, were not made in accordance with operating procedures for 50 percent of the loans GAO reviewed. SBA officials attributed this to staff shortages.

Recommendations

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