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.
The clients are 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.
Small business and guarantors obtained an SBA COVID-EIDL loan for $1,000,000. Clients defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for collection. Treasury added nearly $500,000 in collection fees totaling $1,500,000. Clients were served with the SBA's Official 60-Day Notice and exercised the Repayment option by applying for the SBA’s Hardship Accommodation Plan. However, their application was summarily rejected by the SBA without providing any meaningful reasons. Clients hired the Firm to represent them against the SBA, Treasury and a Private Collection Agency. After securing government records through discovery, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury. During litigation and before the OHA court issued a final Decision and Order, the Firm successfully negotiated a reinstatement and recall of the loan back to the SBA, a modification of the original repayment terms, termination of Treasury's enforced collection and removal of the statutory collection fees.
Clients obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA. Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice. Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt. After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.
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