SBA Loans To Failing Subway Franchisees Under Scrutiny

A U.S. senator has sent a letter to the Small Business Administration (SBA) questioning the agency’s backing of loans to struggling franchisees of Subway and other chains, reports in Restaurant Business Magazine said late last week.

Senator Catherine Cortez Masto has reportedly submitted a letter to the SBA about loans provided to Subway, Dickey’s Barbecue Pit, Complete Nutrition and Experimac after “large numbers” of brand franchisees went out of business. Masto (D-NV) sent the letter to SBA Acting Administrator Chris Pilkerton, seeking information about what the SBA does to support franchisees of struggling brands, and on the SBA-backed loans provided to franchise operators.

The letter noted evidence that franchises may have misled franchisees about the financial strength of the businesses.

“It appears that some of the loan failures may be due to Dickey’s Barbecue providing misleading and inaccurate information to potential franchisees, resulting in failed businesses and bankrupt owners,” Masto wrote, adding that Subway franchisees “are struggling to survive with expensive promotional offers, and corporate decisions that undermine the franchisees’ survival.”

The publication reported earlier this year that Subway saw its franchise locations decrease by more than 1,100 last year. Masto’s letter said that 3 percent of loans to Subway franchisees fail, a higher-than-average default rate. She pointed to a recent New York Post report that found Subway may be forcing some of its franchisees out of business for minor infractions.

The SBA guarantees small business loans made through its lending program, but can use a borrower’s home to underwrite the financing. If that loan fails, the SBA can “go after the borrower’s home,” reports said.

Masto is seeking the SBA’s effort to heighten awareness in Nevada of actions that franchisees can take, and resources the SBA offers, to avoid default. She is also requesting that the SBA take action again “unfair and deceptive practices” in the franchise market.

“I would also like to ensure other franchisees do not receive government-guaranteed loans for franchises with a history of complaints about unfair and deceptive practices,” she said in her letter.