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Franchisees and Loan Default on Third-Party Guarantee Loans: Evidence From the United States

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  • Pankaj C. Patel
  • John A. Pearce II

Abstract

We test the inefficient risk-bearing hypothesis—that third-party loan guarantors bear a higher risk on loans to franchisees than on loans to independent businesses—by assessing whether franchisees default more than independent businesses on third-party guarantee loans. In a sample of 428,233 SBA 7(a) loans disbursed between 2000 and 2016, franchisee loans, compared to independent business loans, with a higher percentage of the loan guarantee or made 1 to 2 years before a recession have a higher likelihood of default. The findings imply a distinctive loan default risk profile for franchisee loans.

Suggested Citation

  • Pankaj C. Patel & John A. Pearce II, 2020. "Franchisees and Loan Default on Third-Party Guarantee Loans: Evidence From the United States," Entrepreneurship Theory and Practice, , vol. 44(5), pages 861-877, September.
    • Handle: RePEc:sae:entthe:v:44:y:2020:i:5:p:861-877
    DOI: 10.1177/1042258719853508
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    2. Erik Markin & Chelsea Sherlock & R. Gabrielle Swab & Benjamin D. McLarty, 2024. "Franchise ownership types and noneconomic performance among quick service restaurants: do family operated franchises receive fewer health code violations?," Small Business Economics, Springer, vol. 63(2), pages 851-869, August.

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