A recent report reveals that small business loan defaults are up dramatically.
When big business giants fall, it's usually loudly in a much-publicized frenzy. For smaller businesses ending their operations in recent months, it's been a quieter storm--but a storm, nonetheless, as more owners short on cash must shutter their stores.
"It comes in dribs and drabs," says small business lending analyst Robert Coleman. "It's not as shocking to our system when they close--when it's one local gas station, a little gift shop--but it's happening every week now."
It's a trend supported by statistics compiled by Coleman in a recent report. He found that defaults on Small Business Administration loans increased dramatically in the last year. For the past half-decade, loan defaults have been on the rise--from 2.4 percent in 2004 to 8.4 percent in 2007. But in 2008, the failure rate climbed to 12 percent.
Coleman determined the failure rate by dividing the number of failed loans by the total number of loans made through the SBA's lending programs since 2000.
"The numbers are brutal, they're ugly," Coleman says, because behind each default (26,718 for 2008) is another small business that's closed its doors. When a business defaults on a loan, the bank liquidates any collateral--sometimes houses or other personal assets.
High failure rates are problematic for those businesses that are still viable too. Already skittish lenders have grown even more hesitant, leaving more small business owners starved for capital. The economic stimulus plan includes increased guarantees on Small Business Administration loans in an attempt to make this type of lending less risky.
Coleman views the relief as a much-needed lifeline. He says, "It might give those businesses that are still around a fighting chance to survive."