Abolish the SBA: $70-83B reasons why it should happen

veroniquedereymercatuscentre1Private gain, Public loss.

Banks, like all buisnesses, just love it when governments underwrite their risks.

It’s only a bonus when Joe Q. Public gets to pay for the drunkard’s binge of “aggressive” to predatory to outright fraudulent loan practices.

Canada, the United Kingdom and the U.S. all have small business loan programs which guarantees defaults.

The North American franchise industry relies very heavily on this debt program to fuel franchise sales. In Canada, the Canada Small Business Financing program is almost the only debt that Schedule 1 banks will offer for franchises (last time I checked).

The U.K. industry discernment is still embryonic. Their Small Firm Loan Guarantee scheme, SFLG is run by the Department of Business, Enterprise & Regulatory Reform, BERR. By the looks of  The Royal Bank of Scotland site, SFLG loans are a big part of the U.K. franchise industry also.

  • Blue MauMau is the most active centre for franchise investor concerns in the world. Tellingly, SBA Loans Free Fall is a current headline.

Dr. Veronique de Rugy, adjunct scholar at the CATO Institute in 2007 (and now senior research fellow at the Mercatus Center at George Mason University) presents some very important facts from a CATO Daily Podcast [see below].

Specifically the U.S. Small Business Act, SBA loan program:

  1. may end up costing citizens $70-billion (maybe $83-B?, if defaults climb faster than projected; unfunded debt that will be added to future taxpayers),
  2. with less than only 1% of small businesses taking out a SBA loan per year, it’s irrelevant economically,
  3. was created 53 years ago when credit information was much harder to determine (program has not evolved as information sharing has improved),
  4. of the loans that are currently on the books, they are “defaulting massively” (SBA loans disproportionally finance doomed business ventures), and
  5. only has 3% of women or minority-controlled firms take take out a SBA loan per year (as a social program it is a bust: 97% of these “discriminated against” groups get their debt elsewhere).

All of this begs the question: If the 7a Loans are defaulting like mad who exactly are benefiting from this program?

To her credit, Dr. de Rugy points directly to the banks and their capacity to sell off the 75% government guaranteed portion on the secondary market and stick the massive debt to the taxpayers if their own default projections are understated (ie. d/recession).

The banks love SBA loans (in a technical sense) because:

  1. 60% of all loans are underwritten by the 10 largest banks can exert market influence even within a very decentalized banking system, comparatively, (in Canada it’s worse: 82.5% all guaranteed loans with Top 5 bankers, 2000-05: FOI author) and
  2. the return on equity for is a minimum of over 3.8 times higher than for regular loans (SBA: 70% v. Regular loans 15-18%).

Listen to the 9:06 podcast and see how $70-billion could be added on top of the current +$700-billion banking bailout. I can’t help but note how fuzzy the banks are so far on accounting for the first bailout installment. [click here]

According to Dr. de Rugy, the SBA loan program serves two very powerful masters:

  1. “lawmakers who have successfully sold the SBA as a program to help the so popular small businesses and
  2. the banking industry, which profits by issuing and selling the low-risk, government-guaranteed small-business loans.”

As of the end of 2006, the SBA had nearly $83 billion in outstanding guaranteed loans that the taxpayers – not the banks – would have to pay if the economy experienced a serious downturn.

BANKING ON THE SBA: Big Banks, not small businesses, benefit the most from SBA loans programs, Veronique de Rugy, August 2007, 4 pages

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3 Responses to Abolish the SBA: $70-83B reasons why it should happen

  1. Carol Cross says:

    More bad news that reflects on the PATRIOT EXPRESS LOAN, an SBA initiative that targets VETERANS and their families, and that was approved in mid 2007, as a pilot program, by The Congress of the USA.

    We see how ineffective regulatory policy by the FTC and the programs of the VA and the SBA work together to put veterans at great risk in the purchase of franchises. I’m sure the IFA was in there pushing this program to our elected officials on behalf of all of the special interests involved.

    FranData, a private corporation, who manages the SBA Franchise Registry for the SBA, permits many unprofitable franchises with high failure rates to be listed on the SBA Registry. All the franchisors have to do is comply with the FTC Rule/FDD’s and make sure that their actual contracts disclaim that the buyer will have success and earn profits when they purchase the franchise. Under existing law, the new buyers are NOT provided MATERIAL risk statistics in the possession of the franchisors and believe there is small risk involved.

    This Initiative was said to be for the purpose of HONORING VETS for their service but apparently the PR value for the Congress and the profits for the banking industry were behind this initiative to produce great activity in the SBA Loan arena.

    Dr. Veronique de Rugy tells it like it is and even explains how the banks have securitized the SBA guaranteed portions of these SBA loans that are then sold to investors.

    But, it is too late! What can be done? There are thousands of positive comments about th PATRIOT EXPRESS LOAN initiative on Google and just a few negatives. Franchisors will be able to continue to hide the lack of profitability of their franchised business plans from new buyers and from investors. The courts become part of the scheme because of the necessity to uphold the binding contracts that underlie the securities that are sold to the public.

    Richard Solomon, Franchise Remedies, is right. The great blood bath is upon us! (Look at the mess of the Brooke Insurance Franchisor who has destroyed so many independent insurance agents and investors as well.)

    Where will it end?

    Like

  2. Carol Cross says:

    WARNING! The SBA Franchise Default List that is printed on THE Blue Mau Mau Franchise Site is not a TRUE REFLECTION of the true and actual failure rate of first-generation, i.e. NEW buyers of franchises.

    Many new franchises are purchased using Home Equity Loans, Savings, 401’s and 403’s, etc… and when franchiSEES fail, they either go into personal bankruptcy or continue to pay on the loans for startup to prevent going into bankruptcy. There is no way to no how many millions of ex-franchisees are paying on startup debt for businesses that they had to close because they either ran out of funds, or were unwilling to keep feeding a losing business.

    LET THE BUYER BEWARE

    There is therefore no

    Like

  3. Carol Cross says:

    correction: “no in second paragraph should be “know”

    PS —If you are looking at a FDD of a franchisor who DOES NOT disclose “earnings” in item 19 of the FDD, it may be a good idea to consider that all of the “transfers” are actually business failures for the franchisee transferring the business to a succeeding franchise in a fire sale of the assets or at least at a LOSS or a WASH.

    Like

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