Over 100,000 franchises are started in the United States every year. However, not all franchises are created equal. In this article, using loan default data that we obtained directly from the Small Business Administration (SBA) for the period from 2000 to 2016, we tell you which are the 50 best franchises according to SBA loan repayment rates and which are the 50 worst franchises based on SBA loan default rates.

New franchisees may have an easier time getting approved for SBA loans than traditional bank loans, but they often require a sizable down payment. If you’re looking for ways to come up with a larger down payment, consider a rollover as business startups (ROBS). A ROBS is a way to use your retirement funds without any early-withdrawal fees or penalties. Learn all about the best kept secret in franchise financing in our free webinar.

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50 Best Franchises by SBA Default Rates

For all of the franchises with the best SBA loan repayment rates, more than three quarters of their SBA loans were paid in full from 2000 to 2016. This indicates that these franchises preformed well enough that their owners were able to meet all their obligations. At number 1 on the list, Straight Shot Express had a 100 % SBA loan success rate, and all of the franchise owners stayed in business and paid back their SBA loans on time.

The 50 franchises with the best SBA loan repayment rates are from all different industries, but many are restaurant franchises like Subway, Mrs. Field’s Cookies, Buffalo Wild Wings, and Little Caesars Pizza. Subway in particular was impressive. Even though Subway franchisees together took out more than 3,000 SBA loans from 2000 through 2016, 77 % of the loans were paid back in full. Barber shops (Sports Clips, Great Clips) and cleaning services (Molly Maid, Merry Maids) also performed relatively well.

50 Worst Franchises by SBA Default Rates

The 50 lowest performing franchises from 2000 to 2016 had SBA loan failure rates that were higher than their SBA loan success rates. In other words, more franchisees defaulted on SBA loans than were able to pay them back successfully. For some of the worst offenders, more than three quarters of franchisees who borrowed SBA loans defaulted on those loans.

Like those franchises with the best SBA loan repayment rates, the franchises with the highest SBA loan default rates span many industries and include fitness franchises, restaurants, and hotels. This goes to show that the particular industry of a franchise doesn’t necessarily determine success or failure.  

How We Ranked These Franchises

We compiled the list above of the best and worst franchises according to their SBA loan repayment rates using data that we obtained from the SBA on 7(a) loans made to franchises from 2000 through 2016. 7(a) loans are the most popular of the different types of SBA loans that are guaranteed by the Small Business Administration and provided by lenders to small businesses around the country. About 10 percent of 7(a) loans go to franchises.

At any given time, that status of an SBA 7(a) loan will be one of four things:

1. Paid in Full – The borrower paid off the loan on time and in full.
2. Charged-Off – The borrower became delinquent on the loan, and the lender took a loss.
3. Canceled – The borrower settled the debt with the lender for a lower amount than he or she owed. This is also a loss for the lender.
4. Current – The loan is currently outstanding.

To calculate SBA loan repayment success rates, we divided the number of Paid in Full loans for each franchise by the total number of loans for the franchise (not including currently outstanding loans). To calculate the SBA loan default rates, we divided the number of Charged-Off and Canceled loans for each franchise by the total number of loans for the franchise (not including currently outstanding loans). We didn’t include loans currently outstanding because, even if the borrower is current now, that could change in the future.

Note: We only considered franchises that had at least 16 SBA loans from 2000 to 2016 (i.e. roughly 1 loan per year at a minimum).

How to Increase Your Franchise’s Chances of Success

According to a report by Service Employees International Union, the failure rate of franchises has been increasing over time. Between 1991 and 1995, 12.7 % of all franchises failed. Between 2006 and 2010, that shot up to 19.3 %.

There could be several reasons for this trend. Franchise agreements, particularly for larger brands, have become more restrictive over time, giving small business owners less authority and freedom to experiment. In addition, since the recession hit in 2008, it’s been harder for small businesses, including franchises, to get capital to grow.

Whether you choose to start a Subway, a Comfort Inn, an H&R Block, or any other franchise, here are a few things you can do to increase your franchise’s likelihood of success:

1. Ask the franchisor for the Franchisor Disclosure Document (FDD) – The FDD outlines estimated costs involved in owning and running the franchise. The franchisor is legally required to provide you with an FDD before you pay them any money. It can help you ensure that you have the capital you need to be successful. Sometimes, franchisors also include earnings estimates in their FDDs, which can help you evaluate the franchise.
2. Consider your experience. Ideally, you should have some experience to help you successfully run the franchise. For example, if you’re starting a McDonald’s franchise, do you have a background in the foodservice or restaurant industries? Do you have general business management experience in hiring employees, training employees, and marketing? Starting a franchise without any experience can put you at a disadvantage when challenges arise.
3. Scope out the location – Location can make or break your franchise. A Subway located in downtown San Francisco is probably much costlier to operate than a Subway located in rural Pennsylvania. However, the San Francisco Subway likely gets many more customers than the Pennsylvania Subway, which helps offset the cost. This is a tradeoff that you’ll have to carefully consider.
4. Enter well capitalized – As the repayment and default rates above suggest, investing in a franchise is no sure bet. As with any small business, you must be sufficiently capitalized. Delays in construction of your location, slow growth of a customer base, unexpected competition, lawsuits, or unrelated personal matters could all contribute to a franchisee defaulting on an SBA loan. An under capitalized franchisee is as more at risk than others when adversity arises.

Ultimately, the key is to thoroughly research the franchise and everything that will be required of you as the owner. Doing your homework ahead of time can prevent unpleasant surprises later and put you on the path to successful franchise ownership.

Additional Resources on Starting a Franchise

Franchise opportunities abound, and owning a franchise can be a lucrative path to entrepreneurship. Just make sure to get as much financial information about a franchise as you can before buying. Our lists above of the 50 best franchises according to SBA loan repayment rates and 50 worst franchises by SBA loan default rates should give you additional insights. 

Of course, you should consider more than SBA loan data when choosing which franchise to own. Lots of other factors, such as startup costs, royalty fees, number of employees you have to manage, and popularity of the franchise among customers, also come into play. If you’re looking for more specific information, click on the links below:

• Best Franchises Under $10K
• 25 Franchises Under $25K
• Best Restaurant Franchises
• Best Cleaning Franchise
• Best Coffee Shop Franchise
• Best Frozen Yogurt Franchise
• Best Ice Cream Franchise
• Best Home-Based Franchises

Once you choose which franchise you are interested in, you’ll likely need some financing to get going. A few franchisors offer financing in-house, but the majority of franchisees need an outside source of financing. 

The SBA is one of the most popular. From 2000 to 2016, banks provided over $24 billion in SBA-backed funding to franchises. SBA loan default rates are useful in evaluating a franchise. If a franchise defaulted on an SBA loan, it means it went out of business or didn’t generate enough profits to pay back the loan. Franchises with high success rates not only paid back their loans but were in business for multiple years. That said, many factors go into a franchisee’s ability to repay an SBA loan. That a franchisee has defaulted on SBA loan does not necessarily mean the franchise is unsound or a bad investment. Rather, SBA loan default data should be one of the many considerations informing your decision to invest in a franchise.

For those considering SBA financing for your next location, read our guide on how to get an SBA loan. If you’d like to read more about all franchise financing options, go here.

Want to see the rest of the data? If you’d like to learn more, send us an email.