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Defaults On The Rise
By Marc Tracy
Not only are Small Business Administration-backed loans falling at a precipitous rate; more and more of those outstanding are being defaulted on, Fortune reports. Specifically: 11.9% of SBA loans (under its flagship 7(a) and 504 programs) in fiscal year 2008 went into default, according to the Coleman Report. Wanna gulp some more? Fiscal year 2008 ended on Sept. 30. So the past five months--you know, the really horrific ones--aren't even factored in.
A look at the performance of these loans over recent years puts this number in slightly less alarming perspective, showing it to be more or less in line with past trends. The default rate in 2004 was 2.6%; 2007's was 8.4%. Graph them, and it gets a little less scary. At some point, though, the trend has to be stopped, no??
Indeed, it seems likely that what will slow the trend is the very thing that we elsewhere complain about: lenders' continued (over-)pickiness in deciding to whom, particularly among small businesses, to grant credit. An advantage of this overabundance of caution is it would seem likely to decrease defaults, or at least slow rates of increase.
The one other problem with all this defaulting, though, is who is getting defaulted on. The answer, of course, given the administration's recent policies aimed at boosting small-business lending (which we've largely, if tentatively, applauded), is that it will be to an increasing extent the federal goverment--which is to say, the taxpayers--that is being defaulted on, given that the SBA is soon to assume the burden and risk of guaranteeing 90% of most SBA loans.
The SBA ended up paying 1.9% of all money disbursed under SBA-backed loans last year, dramatically up from .4% in FY 2004. But, even if overall defaults fall for the reasons we laid out in the previous paragraph, we can expect the amount the SBA is on the hook for to rise given that increased guarantee. Now, maybe that's a good thing: after all, the whole idea is to give banks less to lose and therefore to coax them into lending again.
That said, this increasing disconnect between private lenders' power to make the loans (which is all-but absolute) and their risk on those loans (which is ever-shrinking) does make one wonder if wouldn't just be much more efficient to have the SBA just make these loans itself. Some food for thought.
Comments (0)March 4, 2009 9:08 AM
