Personally Guarantee Repayment
An SBA loan generally requires the owners to personally guarantee repayment. If the loan goes into default, the lender can take the business’s assets, and turn to the business owners personally for any unpaid balance. That is the first thing to understand when your business can’t pay: the problem doesn’t stay with the business.
Forming a corporation or LLC doesn’t change that. The guarantee is almost always unlimited, which means you could have to pay the entire amount of the loan, even if your business fails. If a partner signed with you, you both are liable for every dollar, and the lender can go after whichever of you it chooses.
Owners often ask, “I heard the SBA guaranteed 75% of the loan, so I only owe the bank 25%. Is that true?” No, that’s the bank’s guarantee, not yours. When the SBA pays the bank, the loss shifts from the lender to the SBA. You still guaranteed every dollar, and it’s still the SBA’s right to collect from you. The bank doesn’t just surrender its rights to the SBA and call it a day.
If you pledged your home as collateral, the lender can eventually foreclose on it. The bank can repossess any business asset that is pledged. Even a house you never pledged isn’t necessarily safe. In some states, if the bank gets a judgment, they can put a lien on your house. If they can’t collect on your house, they’ll wait until it sells, at which point the sale proceeds go to the bank. A judgment also lets the bank subpoena you about the details of your financial situation. They can subpoena you for a bank statement, or even to take the witness stand and answer every question they have about you. On the other hand, if yours is a service business without much equipment, the bank may not even bother. Shutting a business down takes time and effort, and it may not be worth their while.
Who do you actually deal with? It depends on where the loan is. The bank services it until it can recover nothing, and then refers it to the SBA. At that point, you will receive a 60-day letter from the SBA. Even if the loan is assigned to the SBA, the bank may want you to speak with them. You may also have to deal with your previous banker if there is unsold collateral. And until the bank closes out its file, going over its head rarely works; the SBA will tell you to “Talk to the lender”.
Offer in Compromise
Here is what most owners don’t expect: an SBA loan can be settled. If your banker says a guaranteed loan can’t be, they are mistaken. Some banks think this is impossible and most businesses are surprised to learn that it is possible. The process is called an Offer in Compromise. Many owners have heard of it, and they think it can be done while the business is up and running. They are in for a big surprise. You’ve got to close up shop and sell the assets to settle the loan. The business doesn’t have to file for bankruptcy; ceasing operations is enough. Settle it once you close the business and really need to get out from under it.
The terms are not designed for people who can easily pay. Inconvenience isn’t enough; the SBA will only settle if you can’t pay it. Don’t think you can just say the payments are tough and leave it at that. It’s not for every case, but it works for a lot of people. It also isn’t fast.
Honesty matters more than anything. If you owe on a house, have a car, or anything with income, show it on your personal financial statement, because you will be questioned about it. You can’t hide assets. The lender will run an asset search and check your credit report. You’ll almost certainly get caught, and the bank won’t take that kindly. Selling the business to a friend and taking it back later is fraud. In the letter that goes with your offer, only give them the facts. Don’t come to them with your baggage. Show the numbers and explain the basis for it.
How much will they take? There’s no formula, because some of it is subjective: your expenses, the equity in your home, your age. How much money will the borrower be able to pay now, or in the future? What does the borrower really have?
This is where an experienced SBA workout specialist helps. Lenders often don’t understand the process themselves, and some decline offers by citing SBA guidelines incorrectly. A good specialist checks the rules and makes sure they are being applied properly. After working with SBA settlements for many years, a specialist knows what might work, and what won’t. Settlements aren’t something you learn overnight.
Whatever you do, don’t try to wait them out. If you don’t pay it, the government eventually comes calling. A loan left unresolved ends up at the U.S. Treasury, and there it’s much harder to settle. A 28% penalty charge is added to the outstanding balance, and Treasury may only take 80% of that larger figure, which can add up to everything you originally owed.
A Personal Bankruptcy Clears the Guarantee
Bankruptcy is the other road. A personal bankruptcy clears the guarantee, but the bank still has a right to foreclose on any collateral you put up. In particular, a lien that was on your house before you filed stays there, and the bank can still come after any business assets pledged as collateral. Talk to a bankruptcy lawyer and a settlement specialist, and decide which is best for you.
After settlement you will be on the CAIVRS list, and won’t qualify for an SBA loan, but a CPA who settled will still be able to do accounting services for others. You aren’t barred from an industry. And you still have your skills, your education, and your knowledge. If nobody at the bank or the SBA will answer you, contact your congressperson’s office. They won’t argue your case, but they will reach out, and the bank or SBA has to respond.
So, to put it plainly: if your business can’t pay its SBA loan, you don’t get to walk away from it; you can negotiate a settlement, but you can’t negotiate a settlement while running your business; there is a process to settle, and an expert can help you. There is always a solution. It may not be the one you want, but it is a way out.
