Default Paradox: The Bigger the Loan, The Smaller the Risk
Default Paradox: The Bigger the Loan, The Smaller the Risk
A deep dive into loan analytics reveals an intriguing paradox: the larger the loan, the lower the risk of default. While high-value loans carry greater financial consequences for both borrowers and lenders, they are statistically less likely to default compared to smaller loans.
For most SBA loans across industries, with only a few exceptions, data shows a clear trend: as loan amount tiers increase, the percentage of loans charged off by banks decreases. Simply put, larger loans are less likely to default and be written off as uncollectible debt.
While the terms "default" and "charge-off" are closely related, they’re not interchangeable. A default occurs when a borrower misses payments, typically for 60 to 90 days, resulting in the loan being categorized as delinquent. A charge-off, on the other hand, occurs when the lender deems the defaulted loan uncollectible and removes it from their active portfolio. Not all defaults lead to charge-offs—if a defaulted loan is cured through repayment, it avoids being written off.
Subsector and Industry Default Paradox
To demonstrate this paradox, we used our analytics platform to evaluate SBA charge-off data across industries, broken down by loan amount tiers. The results were consistent: as loan sizes increase, charge-off percentages decline. Only a handful of sectors deviate from this trend, with isolated exceptions tied to specific loan tiers.
For example, the Food Services and Drinking Places subsector, which includes restaurants, snack bars, and nonalcoholic beverage establishments, has an overall charge-off ratio of 2.36% over a 10-year period ending in 2013. However, when analyzed by loan size, the pattern becomes clear:
Loans under $150,000: 3.36% charge-off ratio
Loans between $350,000 and $1 million: 1.03% charge-off ratio
Loans over $1 million: 0.037% charge-off ratio
This stark decline in charge-offs as loan amounts increase highlights the paradox. Smaller loans carry a higher relative risk, while larger loans are far less likely to be written off.
Franchises and Other Variables
When isolating franchise businesses, the paradox shifts from being a near certainty to a general rule. Established franchise loans exhibit more exceptions, with charge-off ratios influenced by factors like loan amount, project location, and franchise brand. Among these variables, loan size remains the most significant determinant of charge-off likelihood for most all industries.
Impact of the Loan Amount Tier
Using our analytics platform, we analyzed SBA charge-offs through multiple lenses, including NAICS codes, loan tiers, project states, and more. While factors like location and brand play a role, no single filter impacts charge-off ratios at a macro level as much as loan amount tiers.
This article is authored by Darin Manis, founder of LoanBox.
Source: All SBA 7(a) data shared is based on all SBA lending from all sources and not from SBA lending through LoanBox. SBA data and reports are not from the SBA but from SBA data from the lending analytics platform developed and maintained by SBADNA Analytics. SBADNA and LoanBox are both owned by the same parent company FuseSync LLC. LoanBox and SBADNA does not validate or verify the data released by the SBA and provides no warranty of data accuracy or completeness.
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