Franchise Update Magazine Issue II, 2013 | Page 66

Grow Market Lead
64

Market
trends

best way for a lender to make a decision about the likelihood a given loan
By Darrell Johnson
in a particular franchise system will be
paid back? One has to be better than
the other, but which?
To be clear, the SBA and FRANdata
data sets look at slightly different meaLenders must move beyond SBA failure rate data sures and use different time periods.
or years franchise lenders have a brand has very few failed units, lenders FRANdata measures unit outcomes, not
used SBA failure rate data not only will offer more capital, but do franchisee borrower outcomes.
In addition to units that disappear for
as an initial screening tool so on more favorable terms. The questo determine whether they tion lenders must confront is what data operational or financial performance reashould consider a loan to a prospective to rely on to determine the credit risk sons (real failed units), units can simply
or existing franchisee. Many lenders profile. From our credit analysis work, move to another address or come to the
have inserted failure rate limits into they clearly shouldn’t rely on SBA data. end of a renewal period. Outcomes like
Even if SBA performance informa- these make up the difference between
their credit policy guidelines. They do
so even with the clear SBA disclosure tion were accurate, it still wouldn’t re- discontinuous and failed units. All such
accompanying these data that SBA fail- flect the right measure. SBA failure is a data com