Franchise Failure Rates - Best and Worst

CNN Money just announced its top ten franchisees based on popularity as measured through the number of SBA loans over the past ten years. They also added another metric in the study by also calculating the default rate on these SBA loans to measure a failure rate. For the complete article you can click here.

Highlights of the top ten are:

1. Subway - Failure Rate 7%
2. Quiznos - Failure Rate 25%
3. UPS Store - Failure Rate 12%
4. Cold Stone Creamery - Failure Rate 31%
5. Dairy Queen - Failure Rate 8%
6. Dunkin Doughnuts - Failure Rate 8%
7. Super 8 Motels - Failure Rate 4%
8. Days Inn - Failure Rate 6%
9. Curves For Women - Failure Rate 16%
10. Matco Tools - Failure Rate 36%

Franchises are a great way for new business owners to start their own business and control their destiny. With a franchise you are given the playbook on operations, product/services offering, customer service, accounting; plus you have all the marketing support (usually the most difficult in starting a new business). Its like having an expert partner without giving up any equity.

When researching make sure you understand all the upfront and ongoing royalty costs. Yes they can be very expensive. As for Merchant Cash Advances, we are much more comfortable in extending credit to a franchisee due to all the benefits above. Also, a franchisee generally has much more invested in his business as compared to an independent business in the same space. This makes their commitment to the business and business model much stronger.

As a sales agent of MCA, don't forget to target these franchisees (especially those with low failure rates)! They are a great lead source and often yield repeat/referral business as once successful with one location a franchisee will open up several more locations (all require working capital to fuel their expansion).

SBA Writes Off $2.1 Billion In Small Business Loans

Earlier this week the Associated Press reported that our Federal government bought over two billion (that's billion with a big B) in small business loans that have gone bad (that's bad with a big B). This is quite a big jump from from the previous year where the Small Business Administration bought back $1.3 billion in bad loans from banks. For the full article please visit AP.

An analysis conducted by the Associated Press found that the time between loan approvals and loan defaults is narrowing. According to the analysis:

More than $235 million in restaurant loans have been charged off since 2007. The 2,586 restaurant charge-offs make up the largest number of defaulted loans, according to the SBA. More than 150 loans made to Quizno's franchises — worth nearly $15.5 million — have been written off since 2007.

Restaurants have been part of the core market for Merchant Cash Advances since inception and will continue to be so. With default rates like those above, even the SBA will be very wary about guaranteeing loans to restaurateurs. Obviously for our agents selling MCAs you may want to continue targeting this client base.

For those restaurants seeking funding for expansion, improvements, etc. a merchant cash advance will continue to be a feasible alternative for financing. Yes, the rates are much higher than a traditional SBA loan, but given the added risk highlighted above hopefully it is a little more understandable.