Let’s Talk Business: The Need To Know Business Terms For A Company Loan
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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.
Clients obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Clients personally guaranteed SBA 504 loan balance of $750,000. Clients also pledged the business’s equipment/inventory and their home as additional collateral. Clients had agreed to a voluntary sale of their home to pay down the balance. We intervened and rejected the proposed home sale. Instead, we negotiated an acceptable term repayment agreement and release of lien on the home.
Our firm successfully facilitated the SBA settlement of a COVID-19 Economic Injury Disaster Loan (EIDL) f borrower received an SBA disaster loan of $150,000, but due to the severe economic impact of the COVID-19 pandemic, the business was unable to recover.
Despite the borrower’s efforts to maintain operations, shutdowns and restrictions significantly reduced the customer base and revenue, making continued operations unsustainable. After a thorough business closure review, we negotiated with the SBA, securing a resolution where the borrower paid only $6,015 to release the collateral, with no further financial liability for the owner/officer.
This case demonstrates how businesses affected by the pandemic can navigate SBA loan settlements effectively. If your business is struggling with an SBA EIDL loan, we specialize in SBA Offer in Compromise (SBA OIC) solutions to help close outstanding debts while minimizing financial burden.
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