Maybe you got an SBA loan to get the business off the ground, make it through a downturn, or finance growth. Now it hasn’t worked out, and the business is struggling to make the payments. The good news is that there are things you can do. There are modifications and deferments your lender will offer, and the SBA will consider settling. The bad news is that every option has long-term repercussions.
Call the Bank
If you’re having trouble making SBA payments, call the bank before you call the Small Business Administration. The lender services your loan and makes most of the day-to-day decisions. Most lenders are not interested in a loan default, so they will usually work out a repayment plan that works for both parties.
Most loan modifications mean extending the term of the loan and moving the maturity date further out. If your current loan matures in 5 years, and you get it modified to 10, your monthly payments will be much lower. A “deferment” is a short-term pause, usually three to six months (sometimes up to a year), and is useful for temporary crises. If a big order is draining your working capital, or you have a temporary outage (e.g. a broken water pipe shuts the plant for a month), you might ask for a deferment.
Be calm and professional when you call the bank. Do not be aggressive; if you disagree, politely push back and make your case, but be respectful. Always assume you’ll want that lender back when things get back to normal. Call them back when they call, and deliver the requested documents promptly. Helping the lender makes things easier for you. Be open and honest about cash flow issues early rather than hiding them, and work with an SBA resource partner. Good-faith lenders will try to get the borrower back into good standing if the issue is temporary or fixable.
Offer in Compromise
A modification or deferment makes sense when you hit a short rough patch. But if your business is losing money every month and shows no signs of turning a profit, a deferment is like putting a bandage on a broken leg. Sometimes the only solution is to close up shop. That is never easy, but it’s often the right call. You hope that closing means the end, but unfortunately it doesn’t always.
Most SBA loans come with a personal guarantee. That means that even when the business closes down, the debt sticks with the owner. The government has a pretty good idea you can’t get blood out of a stone, so the SBA might consider a settlement known as an ‘offer in compromise‘ (OIC). Of course, it isn’t a guarantee, you don’t automatically qualify, and you have to prove you are financially struggling and can’t afford to repay over a reasonable time frame.
How much will the SBA accept? It’s really primarily about whether or not the debt can be collected. The SBA typically considers whether you have money in a bank account, your wages, and property that can be levied or garnished. Having little garnishable property is certainly a point in your favor, but it will not necessarily be a get-out-of-jail-free card. Savings in a 401(k): the SBA cannot force a disbursement of your savings from a 401(k) account, but you may need to make a voluntary disbursement as part of a settlement. This is because you must demonstrate that you are experiencing a hardship and that you are not able to pay the debt in full.
Settlements aren’t arbitrary percentages; they’re based on your personal financial situation. You must provide the lender and the SBA with a complete financial disclosure, including a personal financial statement (SBA Form 770), your tax returns and bank statements. When you negotiate a settlement, it’s based on what you can afford, not what you prefer, so don’t expect a deal that is too good. If you can’t reach an agreement with your lender and the SBA, your debt is transferred to the Treasury Department, where any settlement is set by an arbitrary percentage.
Be careful with settlement. The portion that the lender forgives may be taxed to you, and you might receive a 1099 for it. In addition, the Small Business Administration may report the settlement to the credit reporting agencies (though if it wasn’t consumer debt, you may be able to dispute it). Either way, you’ll also be listed in CAIVRS (Credit Alert Verification Reporting System), the government’s list of people who have defaulted on a federal debt.
If you ignore the demand letter, the SBA forwards the debt to the U.S. Treasury for collection through the Treasury Offset Program (TOP). Treasury can garnish your wages, garnish your Social Security or other retirement benefits, withhold your federal tax refunds, and apply the debt to any of your bank accounts. There is no statute of limitations on these federally backed loans, and no court judgment is required to garnish. It’s possible to settle with the Treasury but you’re unlikely to get a good deal, and it’s likely to cost much more than the SBA would have taken.
Avoiding a Default
Don’t avoid the lender if you might default on a loan. When you stop responding, the lender must act quickly. Instead, be proactive and reach out. An attorney familiar with SBA loans and bankruptcy can help you navigate the process. Keep in mind that a personal guarantee means the lender can come after you personally, and the lender may have a second lien on your home, potentially putting your home at risk. A default is no trivial matter.
Avoiding a default is always preferable. Be clear about what you’re signing up for before you borrow: SBA has free or low-cost business counseling available through its district offices and its network of small business resource partners throughout the country. It’s smart to lean on financial and legal pros for small businesses, even very small ones, before you hit the default point. They come with fees, but they also offer checks and balances for your finances (and those of your stakeholders.)
If you’re already facing default on payments, strengthen your cash position and reduce your costs. Renegotiate with vendors, reduce hourly employees’ hours, and lower your own salary. Sell unused assets, such as equipment, underused vehicles, or real estate. If you already have business loans, see if you can consolidate them for a better deal. If all else fails, consider selling all or part of your business. A struggling business won’t sell for top dollar, but it could be worth something to a competitor, or a company looking to enter your market. You may be able to sell a product line you never maximized, some intellectual property, or access to your customer list.
If you have reason to believe your revenue will cover your expenses by the end of the year, perhaps a bridge loan or credit card receivables financing may be available to you, or you may be able to have your loan refinanced through an alternative lender with more flexible terms. You likely didn’t take out your SBA loan because you wanted to go out of business. But we all know from experience that starting or running a business doesn’t always work out. If your business is struggling and you’re considering closing, you may be able to settle your SBA loan.
