Should SBA lenders avoid financing small businesses in certain industries? Because loan performance is much worse in some industries than in others, tax payers should consider this question.
On its website, the National Association of Government Guaranteed Lenders (NAGGL) provides some data that shows the number of loans, amount disbursed, failure rate, and charge-off rate for 7(a) and 504 loans approved between the fourth quarter of 2000 and third quarter of 2008 and later disbursed (for industries in which at least five companies received an SBA loan).
While the information in this table comes from voluntary disclosure by lenders and not from the SBA or any other government agency, the numbers still provide insight into the wide variation in SBA lending and loan performance across industries.
From 2000 to 2008, NAGGL reports that lenders made 566,437 SBA loans to small businesses, totaling almost $116 billion. Full service and limited service restaurants received the largest portion of loans, garnering 5.1 and 3.8 percent of the borrowings, respectively. When measured in terms of amount lent, full service restaurants were again the biggest recipient, taking 5.8 percent of the loan dollars, although hotels and motels came in a close second at 5.7 percent.
The average size of the SBA loans was just over $204,000. However, loan size varied greatly across industries. At the low end, offices of notaries had average borrowings of little more than $16,000. At the high end, fats and oil refining and blending had loans averaging in excess of $903,000.
Of course, these figures might be imprecise; both of these industries had fewer than ten SBA borrowers in the 2000 to 2008 period. However, the numbers are similar for industries that had more than 50 borrowers. Blood and organ banks, for instance, borrowed an average of just less than $23,000, as compared with hotels, which had an average loan size of over $860,000.
The variation in SBA lending across industry is interesting, but even more fascinating is the industry differences in the performance of these loans. On average, the failure rate of the loans was just shy of 12 percent. However 82 industries had no loan failures between 2000 and 2008. At the other end of the spectrum, all five loans to motor home manufacturers failed.
Similar variation was present in industries with a more sizable number of loans. Several industries with more than 50 SBA loans had no loan failures between 2000 and 2008, yet shellfish fishing, which had 243 loans over the period, saw 75.7 percent of them fail.
The pattern was similar for loan charge-offs. The average amount charged off was about 2 percent. However, 82 industries had no charge-offs. Motor home manufacturers had the highest amount charged off, at 62.1 percent of the amount disbursed. And the highest charge-off rate for an industry with a more sizable number of loans was shellfish fishing which saw 28.4 percent of the amount disbursed charged off.
The sizable industry differences in the performance of SBA loans raises an interesting question: Should banks be making fewer SBA-guaranteed loans in industries like shellfish fishing, motor home manufacturing, and automating vending machine manufacturing, which have high loan-failure and charge-off rates? Should they instead be making more loans in industries like oil and gas pipeline and related structures construction, beef cattle ranching and farming, all of which had no SBA loan charge-offs or failures between 2000 and 2008?
If you pay taxes, then your opinion on this question matters. If SBA guaranteed loans are being made in industries with very high loan-failure rates and amounts charged off, then your tax dollars are being used to guarantee small business loans that may be too risky to undertake.
Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.