When you signed on the dotted line, you had every intention of repaying your Small Business Administration (SBA) loan. Unfortunately, things happened that steered you off course and now you’re unable to meet the agreed-upon repayment terms.
You aren’t alone. Defaulting on SBA loans is more common than you think. According to a recent report by the SBA, defaulted guaranteed business loans in the past few decades have totaled nearly $3.5 billion. Here’s what you need to know if you’re asking yourself, “What is an SBA loan default?” Find out what you can expect if you’ve fallen on hard times and now face an SBA loan default.
When Is My SBA Loan Placed in Default?
When your SBA loan is placed in default depends on the individual terms of your contract. In general, lenders will attempt to collect funds 90-120 days before initiating the SBA loan default process.
If at all possible, try to avoid going into SBA loan default. One way you can do this is by keeping the lines of communication open with your lender. If you’re experiencing financial hardships, letting your lenders know may make them more willing to:
- Rework the repayment structure of your contract by lengthening your term
- Allow you to pay only interest for a period of time
- Defer payment altogether for a short period of time
Lenders are often willing to work with you so you can avoid an SBA loan default, so don’t be afraid to reach out to see what options are available.
What Happens When You Experience an SBA Loan Default?
If alternative options aren’t available, or you have no ability to make payments, then SBA loan default becomes a reality. Your lender will initiate the collection process, starting with the seizure and liquidation of assets.
Seizure of Business Collateral and Personal Assets
To recoup funds from an SBA loan default, lenders will attempt to seize and liquidate any assets you listed as collateral on your loan agreement. This might include business bank accounts, property, inventory or equipment. You may even be required to sell your business to settle the debt.
When you secured your loan, you likely signed an SBA loan personal guarantee agreement. If the value of your business assets isn’t enough to cover your delinquent debt, your personal assets may be on the line. The same holds true for any business partner who also signed a guarantee alongside you.
Depending on your type of business organization, you may think you’re in the clear, but this isn’t the case. An SBA loan personal guarantee agreement is legally binding even if your business is incorporated or an LLC.
If the debt isn’t repaid after the seizure and liquidation of assets, the lender more than likely will file a claim with the SBA for the guaranteed portion of the loan, minus the amount they were able to recuperate through the collection process.
At this point, you may be left with no assets (business or personal). The process isn’t over, though. With the lender repaid, the federal government will now attempt to recover the funds they gave to the lender.
The SBA Loan Default Collection Process
The SBA will first send you a 60-day demand letter. During this period, you’ll be required to pay the debt in full or provide an offer in compromise.
What Is an Offer in Compromise?
An offer in compromise allows you to settle your debt for less than the full amount you owe. If accepted, the federal government and lender forgive the remaining balance. It’s important to note an offer in compromise is only applicable to businesses that have ceased operations and liquidated all assets and used those proceeds to reduce their delinquent debt.
SBA Loan Forgiveness Explained
The SBA and lender will accept an offer in compromise if it’s deemed fair and you have the financial ability to repay the sum within a reasonable time frame.
Your lender and the SBA will make this determination after conducting a thorough review of your finances, including:
- Tax returns
- Assets (business and personal)
- Transfers or acquisitions of assets, including the relationship of and contact information for the person who acquired the asset
- Statement of income
Please note, the SBA doesn’t have to accept your offer in compromise. If rejected, you usually have the opportunity to revise it and resubmit. For this reason, it may be helpful to seek the advice of an attorney who specializes in debt settlement and SBA loan forgiveness. He or she may be able to help you craft a sound settlement offer that will have a better chance of being approved by your lender and the SBA.
Transfer Your Account to the U.S. Treasury Department
If you can’t reach an agreement with the SBA, your account is transferred to the U.S. Department of the Treasury. To recoup the funds from your SBA loan default, the department can leverage a range of collection methods, including the garnishment of any of the following:
- Tax refunds
- Social Security benefits
- Federal/military pay
- Federal/military retirements
- Contractor/vendor payments
- Railroad retirement benefits
What to Do If You’re Facing an SBA Loan Default
The SBA loan default process is certainly no picnic. It’s stressful, expensive and downright scary at times. Despite this, don’t panic.
If you’re facing an SBA loan default, keep the following in mind:
Don’t Avoid Your Lender
When a business falters or has failed, it’s no doubt a traumatic experience. When your lender comes calling after a default, it’s critical you respond. Otherwise, your lender might sue you, or close their file and refer it to the SBA.
If you ignore the SBA, the file goes to the Treasury Department. When the Treasury Department gets involved that could mean garnished wages and Social Security benefits.
Don’t Hold on to Your Business for Too Long
When you’ve invested so much of your time, money and effort into your business, it can be downright excruciating to let it go. But if it’s clear that failure is inevitable, don’t take on more debt or drain all of your personal reserves to keep your doors open. Before you take another 401(k) withdrawal to make payroll, think about the fact that if a settlement becomes the goal, you need to have resources to draw from.
Do Consider Hiring a Business-Debt Settlement Attorney
If you find yourself in SBA loan default, don’t wait until the U.S. Treasury Department is garnishing your wages before reaching out to a professional for guidance. A business-debt attorney can help you navigate the collection process, submit an effective offer of compromise claim or determine if declaring bankruptcy is a better choice for your particular situation.
Final Thoughts on Avoiding an SBA Loan Default
When you face the prospect of an SBA loan default, it’s easy to feel powerless. Don’t. Communicate with your lender early and often to arrive at a repayment plan that better suits your financial situation. If circumstances have left you in a position where you simply can’t pay and an SBA loan default is inevitable, put in the required effort to settle the debt as best you can.
As you go through the SBA loan default process, consider these small business owner quotes designed to motivate and inspire. Once you’re able to turn the page on this unfortunate chapter, you can move forward and focus on restoring your financial health.