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SBA loan defaults
Small Business Administration (SBA) loans can help a small business grow and succeed. The SBA works with lenders and small businesses to ensure each party benefits. Still, there is always the possibility of SBA loan defaults.
From the period of 2006 through 2015, 1 in 6 SBA loans failed. There are a number of factors that can result in this failure, but overall, it's a trend closely linked to the economy.
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Before we get into the instances of loan failures, let's discuss the background of the SBA loan program.
The SBA itself does not lend money to business owners directly. Instead, it fosters relationships between trusted lenders and responsible businesses.
The goal is to reduce risk on both sides. The SBA provides guidelines for loan vendors and vets business owners to make sure they can pay loans back. This makes it a win-win on all sides.
For small business owners, the benefits include small down payments, little-to-no required collateral, and competitive rates and fees.
For lenders, recipients must meet certain requirements to reduce or eliminate the chances of default. There's even free business counseling to help business founders get on their feet.
Unfortunately, nothing is foolproof. SBA loan defaults do occur, and there are some common factors that come into play.
With 1 in 6 SBA loan defaults within the last decade, it's important to look into why this is happening.
Research has found that recent high rates of default can be linked back to the Great Recession
As the economy weakened, people lost their jobs, homes, and lifestyles. People could no longer afford the houses they owned, and lost them to foreclosure. Would-be buyers were no longer in a position to purchase real estate.
It was a downward spiral that put a strain on the entire real estate sector. Therefore, it should come as no surprise that the highest rates of SBA loan defaults at this time came from the real estate sector.
Mortgage and non-mortgage loan brokers, residential property managers, real estate agents and brokers, and multifamily construction companies all dominated the default rates within the past decade.
These were the businesses hit hardest by the Great Recession, and have been struggling to come back to their former strength.
Even now, while housing demand is rising and the real estate sector is coming back to life, real estate agencies have been seeing more competition from online resources.
Brick-and-mortar brokerages are feeling the heat from listing websites that not only make finding a home easier, but make selling a home cheaper.
Lower overhead costs thanks to digital space replacing physical buildings means online agencies can charge lower listing fees and commissions.
This is definitely putting a strain on real estate agencies.
But they aren't the only industry players leading default statistics. There have been a number of other industries plagued by modern economic and technological shifts.
Video and disc rental companies saw a 42.7% default rate from 2006-2015, which should come as no surprise given the current state of video and music consumption.
People no longer need to inconvenience themselves with a trip to the local store for a movie to a watch.
They no longer even need a physical DVD or CD to enjoy the entertainment. Thanks to streaming services, everything gets delivered seamlessly to the playing device.
This new entertainment shift has resulted in countless business failures in the multimedia rental companies. Big and small companies alike have felt the pinch in this sector.
In addition to real estate brokerages and video rental companies, a number of franchises have also been found likely to default. If you plan to buy a franchise in the future, there are a few things to keep in mind.
The Number 1 franchise business most likely to default on SBA loans was Wings-N-Things, with an SBA loan default rate of 88.89% from 2000 to 2016.
The next highest was Noble Roman Pizza, with a default rate of 88.00% for the same time period.
Overall, smaller fast food chains, fitness centers, and tanning studios were among the most common small business franchises to default on their loans.
That's not to say that all food chains can expect to see similar results. Well-known franchises such as Buffalo Wild Wings and Wendy's were among some of the most successful franchise businesses from 2000 to 2016.
This goes to show that it's not always the industry segment that has a hand in success, and there are other factors at play. Name recognition may help, and there may be different management styles that also have a role.
In fact, as franchise agreements have become more restrictive for business owners over time, the failure rate has increased.
It's not necessarily a cause and effect, but it could suggest that less autonomy within a business reduces the chances of success. Different markets will behave differently, so businesses often need a certain amount of flexibility to attract customers.
The best way to avoid loan default is by not entering into an industry that is likely to result in failure from the start.
It's vital that prospective business owners conduct thorough research into the industry they'd like to enter. Take a look at which businesses are doing well, and which ones are struggling.
There may be certain factors that you can identify quickly, such as location, start-up costs, advertising, corporate support for franchises, etc. All of these can play a major role in how successful your business will be.
Remember that low operating costs may be related to low traffic areas. While it may seem cheaper to get started initially, it could be more difficult to sustain long-term due to a smaller customer base.
Think about which industries have room for growth. If you're already seeing people turning to different alternatives, don't expect things to turn around. It is impossible to predict how things will play out, but there are always red flags to avoid.
If you already operate a business and are having trouble paying back your SBA loans, there may be options available to help your situation.
Schedule a case evaluation to see how we can help.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Our firm successfully negotiated an SBA offer in compromise (SBA OIC), settling a $974,535.93 SBA loan balance for just $18,000. The offerors, personal guarantors on an SBA 7(a) loan, originally obtained financing to purchase a commercial building in Lancaster, California.
The borrower filed for bankruptcy, and the third-party lender (TPL) foreclosed on the property. Despite the loan default, the SBA pursued the offerors for repayment. Given their limited income, lack of significant assets, and approaching retirement, we presented a strong case demonstrating their financial hardship.
Through strategic negotiations, we secured a favorable SBA settlement, reducing the nearly $1 million debt to a fraction of the amount owed. This outcome allowed the offerors to resolve their liability without prolonged financial strain.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
Clients executed personal and corporate guarantees for an SBA 7(a) loan from a Preferred Lender Provider (PLP). The borrower corporation defaulted on the loan exposing all collateral pledged by the Clients. The SBA subsequently acquired the loan balance from the PLP, including the right to collect against all guarantors. The SBA sent the Official Pre-Referral Notice to the guarantors giving them sixty (60) days to either pay the outstanding balance in full, negotiate a Repayment (Offer in Compromise (OIC) or Structured Workout (SW)), challenge their alleged guarantor liability or file a Request for Hearing (Appeals Petition) with the SBA Office of Hearings & Appeals.
Because the Clients were not financially eligible for an OIC, they opted for Structured Workout negotiations directly with the SBA before the debt was transferred to the Bureau of Fiscal Service, a division of the U.S. Department of Treasury for enforced collection.
The Firm was hired to negotiate a global Workout Agreement directly with the SBA to resolve the personal and corporate guarantees. After submitting the Structured Workout proposal, the assigned SBA Loan Specialist approved the requested terms in under ten (10) days without any lengthy back and forth negotiations.
The favorable terms of the Workout included an extended maturity at an affordable principal amount, along with a significantly reduced interest rate saving the Clients approximately $181,000 in administrative fees, penalties and interest (contract interest rate and Current Value of Funds Rate (CVFR)) as authorized by 31 U.S.C. § 3717(e) had the SBA loan been transferred to BFS.
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