A Farmer Boys franchisee in California and Arizona has filed for bankruptcy. | Photo: Shutterstock.
Another multi-unit franchisee has filed for bankruptcy after using merchant cash advances to finance their business.
Geddo Corp., which operates 12 locations of the fast-casual burger chain Farmer Boys in California and Arizona, filed for bankruptcy earlier this month after taking out 40 merchant cash advance loans worth $5.2 million.
Geddo operates 11 restaurants throughout California, in cities like Orange, Lodi, Corona and Bakersfield.
The company planned to build two locations in Arizona, in Goodyear and in Phoenix. It took out the MCA funds to pay for the buildout.
Merchant cash advance companies provide temporary financing for mostly small businesses and are repaid by taking funds directly out of accounts. They charge high interest rates.
Such financing as a result can be expensive and can drain companies of their cash flow. That is what happened in this case.
The lenders’ collection efforts “caused severe pressure” on Geddo’s cashflow and made it unable to pay its vendors. The franchisee defaulted on payments to the franchisor, vendors and other service providers.
Geddo made an “extensive effort” to negotiate with lenders before filing for bankruptcy, and “apart from a few reasonable MCA lenders, most greedily refused to cooperate and chose to strangle” the franchisee, the company said in court documents.
Geddo said that it cannot sustain its operations with the loans in place and after the negotiations did not come to an agreement it filed for bankruptcy.
This is the latest in a string of franchisee bankruptcies this year, including large-scale operators of Carl’s Jr., Subway, Popeyes and Firehouse Subs. Many franchisees are struggling with weak sales due to the economic environment along with rising costs.
But financing challenges in some cases have operators turning to MCA providers. MTF Enterprises, a 43-unit Subway franchisee, filed for bankruptcy after using high-interest advance financing.
Last year, Matador Restaurant Group, a Del Taco franchisee, filed for bankruptcy after taking out $2.7 million worth of such advances.
Farmer Boys has more than 100 locations in California, Nevada and Arizona. System sales at the brand decreased 3.1% last year to $234 million, according to data from Restaurant Business sister company Technomic.
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