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Which Industry Has the Most SBA Loan Defaults? Learn What Can Be Done About Your SBA Loan.

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Which Industry Has the Most SBA Loan Defaults? Learn What Can Be Done About Your SBA Loan.

Which businesses are defaulting most on their SBA loans? Learn what's behind these SBA loan defaults and what you can do about yours.

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.

https://youtu.be/z-Gqw-aByk0

Why Pursue an SBA Loan?

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.

Economic Trends Related to SBA Loan Defaults

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.

Which Industries Are Most Likely to Default on SBA Loans?

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.

Real Estate Agency Challenges

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.

Media Rental Companies Losing to Digital

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.

Franchises Likely to Default on SBA Loans

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.

Food Chains Feeling the Heat

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.

Food Franchises That Buck the Trend

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.

Avoiding Loan Default

The best way to avoid loan default is by not entering into an industry that is likely to result in failure from the start.

Do Your Homework

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.

Calculate the True Costs of Ownership

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.

Cater to the Target Market

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.

Look to the Future

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 free case evaluation to see how we can help.

This presentation contains images that were used under a Creative Commons License. Click here to see the full list of images and attributions:
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Why Hire Us to Help You with Your Treasury or SBA Debt Problems?

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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

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$375,000 SBA 504 LOAN - SBA OIC CASH SETTLEMENT

$375,000 SBA 504 LOAN - SBA OIC CASH SETTLEMENT

Client personally guaranteed SBA 504 loan balance of $375,000.  Debt had been cross-referred to Treasury at the time we got involved with the case.  We successfully had debt recalled to the SBA where we then presented an SBA OIC that was accepted for $58,000.

$1,200,000 SBA 7A LOAN - SBA OHA LITIGATION

$1,200,000 SBA 7A LOAN - SBA OHA LITIGATION

Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture.  After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against our client’s monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars.  We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA).  As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy), but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.

$488,000 SBA 7A LOAN - SBA OHA LITIGATION

$488,000 SBA 7A LOAN - SBA OHA LITIGATION

Clients personally guaranteed an SBA 7(a) loan.  The SBA referred the debt to the Department of Treasury, which was seeking payment of $487,981 from our clients.  We initially filed a Cross-Servicing Dispute, which was denied.  As a result, we filed an Appeals Petition with the SBA Office of Hearings and Appeals asserting legal defenses and supporting evidence uncovered during the discovery and investigation phase of our services.  Ultimately, the SBA settled the debt for $25,000 - saving our clients approximately $462,981.

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