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SBA Charged Off Rates from 2008-2009
20% of SBA Loans Defaulted During The Great Recession
Vetted Biz is the leading platform for accessible and analytical data on franchises and businesses available in the U.S. Our research team has reviewed over 2,900 franchises and businesses and knows the key facts and data that signal a successful investment opportunity. In addition to our review of active investment options, our team at Vetted Biz has also conducted a significant analysis on the Small Business Administration (SBA) 7(a) loan program, where extensive review of the data made available by the SBA on loans issued to franchises and non-franchises over the past 30 years was carried out.
Being the only cabinet-level federal agency fully dedicated to supporting small businesses and entrepreneurs from counselling to capital, the SBA has allowed for a discerning insight into small business performance over the past 30 years, which can bring significant awareness of industry potential when looking for new investment opportunities to potentially venture in.
The article below analyzes industry performance during the Great Recession that ran from late 2007 to 2009. It will look at how the recession affected the number of businesses per industry that defaulted on their loans throughout that period of time, and will go further in depth in understanding what the longevity of these impacts across industry’s were, as well as what their recovery curves eventually looked like.
SBA “Charged-Off” Loan Status
There are a number of statuses an SBA loan can be classified under, which will vary in accordance with what stage of the loan payment program the loan currently finds itself in. If a loan has been repaid in full, including all principal and interest payments for example, the loan is said to have been “Paid-In-Full.” If, on the other hand, the SBA no longer has a reasonable expectation of further payment after the loan has been defaulted for a certain amount of time, then the loan is considered to have “Charged-Off”. For the purposes of this particular analysis, we will be focusing mainly on the number of loans that Charged-Off across industries throughout the 2008 recession, particularly in comparison to their numbers pre- and post- recession.
An interesting number that was found when comparing loan charged-off rates across the decades, was that while 9.86% and 3.93% of loans charged-off in between the years of 1991-1999 and 2010 – 2019 respectively, that number had an exponential increase during the Great Recession decade that led 21.74% of loans issued during the years of 2000 – 2009 to have Charged Off.
That being said, it was found that of all loans that Charged-Off over the past 30 years, 80% of them did so during the decade of 2000-2009, which potentially indicates a significant impact of the Great Recession on the performance of loans issued through the SBA loan program at that time. While further analysis will be conducted on each industry’s loan performance during those three crucial years, it is important to note that the top reason on why businesses fail, are normally related to changing consumer needs that eventually lead to a fall in demand. This characteristic can be said to have been predominant throughout the recession, when the majority of the working population found their financial plans and priorities being turned upside down in a matter of hours.
Additionally, another factor that must be noted was that throughout the Great Recession, the SBA not only saw an increase in the number of loans being Charged Off, but also a decrease in the number of loan applications that year. This second trend once again emphasizes the extensive impact the Great Recession had on small businesses in particular, which were classified as the group who experienced the biggest drawback in its growth rate during those two years.
Charged-Off Loans and the Great Recession
Our team at Vetted Biz conducted an in-depth analysis on industry loan performance throughout the Great Recession years that would tentatively allow us to better understand the reasons underscoring a business’ success within each particular industry as well as to predict how these industry’s might react throughout future recessions such as the one we are currently incurring.
In terms of industry performance, we found that the Food and Beverage industry had the worst performance throughout the Great Recession, where loans within that industry accounted for over 50% of the Charged Off Loans during that time.
This number was subsequently followed by the Retail Products and Services industry with 16%, and later by the Business Services industry with 7% of the loans that Charged Off throughout those years. Additionally, when comparing the percentage of loans that Charged Off during those three years to the number of Charged Off Loans within that particular industry over the past 30 years, we found that loans within the Real Estate industry were the ones most severely affected, where over 20% of their Charged Off loans from the past 30 years, occurred from 2007 – 2009.
In terms of most industry’s worst performing months, we also found that the second quarter of 2008 were the worst months in terms of number of Charged Off Loans. As the graph below shows, although there was a considerable discrepancy amongst the number of loans that were Charged Off across industries, almost all of them experienced their highest Charged Off loans, throughout May to September of 2008 – a factor that is contingent, given that those were defined as the “peak” months of the Great Recession. Similarly, it was also interesting to note that prior to their eventual recovery almost all industries shown in the graph below, had a reoccurring spike in their number of Charged Off loans, which consequently indicates that for future recessions industries should almost always expect a subsequent drop after the initial “crash” prior to an eventual recovery.
Another important factor that was considered when analyzing SBA loan performance throughout the Great Recession was how this performance was impacted when taking into consideration whether the loan was issued to a franchise or a non-franchised business. As the charts below show, the loan Charged Off rates across non-franchised businesses were much more equally distributed across industries, than those within the franchise industry.
It is interesting to note that industry’s with extremely high Charged Off loans, such as the Food and Beverage industry, had a much stronger performance when the business was a non-franchise instead. Franchisors regularly emphasize being there for their franchisees and providing crucial support in times of need.
In the case of the Food and Beverage industry for example, it is possible to determine that business owners that were left to fend for themselves actually did better than those relying on stronger support systems such as those found in a franchise.
Conclusion
There is no question that Small Businesses were significantly impacted by the financial crisis that ensued from late 2007 all throughout 2009. As the analysis above shows, beyond SBA Charged Off rates being higher than normal throughout those 3 years, these rates had significant impacts on industries that have normally performed well such as the Food and Beverage, and Retail Products and Services. Would be business and franchise buyers should research the historical default rates for their chosen industry to see if franchise or non-franchises have been more successful.
As we begin to move past a second recession wave that was brought upon the Covid-19 Pandemic, it is important to consider industry performance throughout past recessions as well as how their loan default curves looked like throughout that time not only so that one can better predict what future recoveries will ensue, but also so that one is able to better capitalize on their chances of success when it comes to SBA loan applications within certain industries. Moving forward, it will be interesting to consider how industry recovery graphs for the covid-19 recession will look like, based on industry loan performance during the years of 2007 to 2009.
