What Brokers Don't Tell You About Default Rates

The SBA quietly keeps a scoreboard of which businesses fail, and you can read it before you buy one.

Every broker pitch leads with upside. Revenue trend, add-backs, the seller's story about why now is the perfect time. What no broker hands you is the other half of the ledger: how often businesses that borrowed the same way, in the same industry, ended up defaulting on the loan. The SBA tracks exactly that. Default and charge-off rates by industry, published and public. The spread is not small. Loans secured by owner-occupied commercial real estate default at roughly 2 to 4%, because the collateral protects the lender. Highly leveraged acquisitions in volatile sectors carry meaningfully elevated risk. Same program. Same guarantee. Wildly different odds, depending entirely on what you buy and how you structure it.

What The Default Data Actually Measures

Default rates are a measure of fragility, not a verdict on any one business.

Read this carefully, because it is easy to misuse. A high industry default rate does not mean the specific business in front of you is doomed. It means businesses in that category have historically had less margin for error: thinner cushions, more customer concentration, more exposure to one bad quarter. The SBA's own guidance is blunt about it. Individual business performance matters far more than the industry average. A well-run shop with strong reserves and an experienced operator can crush the average. A poorly run business in a safe-looking sector can underperform it. The number is not a fortune teller. It is a flashlight. It tells you where to point your due diligence, not whether to run.

Why The Spread Exists

Collateral and cash flow stability drive almost the entire difference.

The pattern under the data is the same pattern the Bulletproof framework was built around. Low-default categories tend to have hard collateral (real estate, equipment that holds value) and predictable, recurring cash flow. When the business hits a rough patch, there is something for the lender to recover and something for the owner to lean on. High-default categories tend to be leveraged purchases of businesses with soft assets, concentrated revenue, or earnings that swing with the economy. When those hit a rough patch, the debt service keeps coming and the cushion is already gone. I have seen this play out on deal after deal over the last several years: two buyers, two similar-looking businesses, and the one who structured for a downturn is still standing while the one who borrowed to the ceiling is not. The default data is just that story, told at scale.

The broker sells you the best quarter. The default data shows you the worst one.

The Move

Use the industry default rate to set how hard you stress the deal, then prove the deal survives it.

Here is how I would use this if I were you. Pull the default rate for the industry you are looking at. If it sits in the low single digits, your standard stress test is probably enough. If it runs high, that is your signal to stress the deal harder than usual: model a steeper revenue decline, demand a fatter working capital cushion, and insist on a structure where the seller keeps real skin in the game so they are accountable after closing. After 35 years of looking at these, the deals that survive bad years are almost always the ones that were structured for a bad year before it arrived. The whole point of the stress-tested DSCR is to make sure your deal still covers its debt when revenue drops 20%. A high-default industry just means you should believe that 20% could actually happen. You can run any deal through that exact stress test at DealScore Pro and see whether it holds before you ever sign.

What This Means For You

Before your next offer, look up the SBA default rate for that industry and let it set your stress assumptions. If the category runs hot, structure for the downturn now, because the cushion you build before closing is the only one you will get.

Structuring a deal to survive its worst year is the core of the method. The free masterclass walks through the exact stress test and the structure that keeps you solvent when the numbers turn.

Want to see how I stress-test every deal against cost shocks, revenue dips, and hidden liabilities before I'd put a dollar at risk? I walk through the entire Bulletproof method in a free 28-minute masterclass.

Forward this email. Tell them to grab Mike's free book - Real Estate Is for Suckers: Buy a Business Instead. Same framework Mike uses to stress-test every deal.