When you’re not making your payments on a loan guaranteed by the SBA, it’s easy to feel helpless, and the choices start to get a little overwhelming. Although it feels like it at the time, it’s not a world-ending event. Still, defaults on business loans get ugly, and if your business loan is backed by the U.S. Small Business Administration, it gets even uglier. The long and the short of it is, if you can’t pay back the loan, you need to know what to expect so that you can plan ahead.
But there’s a difference between delinquent and in default. A delinquent loan isn’t in default. Once you start missing payments on your SBA loan, most lenders would classify it as delinquent. They’d probably contact you about the delinquency, and ask for immediate payment. But you’re not in default yet. Don’t panic. A default occurs when you repeatedly fail to meet the terms of your loan agreement. This includes multiple missed payments and having no resolution with your lender. Lenders don’t feel confident that you can or will pay back the loan. If you fail to make your payments or contact your lender for three to four months, your loan is likely in default. The longer you wait, the harder it will be to catch up and avoid default.
The Lender Can Repossess Any Collateral
What happens next varies from lender to lender, but the broad strokes are predictable. Upon your default, the lender can repossess any collateral that secured your loan, such as real estate, inventory, or equipment. It will sell this collateral to recoup the outstanding debt. If necessary, the lender may also take and sell your personal assets under the personal guarantee, along with those of any other individual who provided a personal guarantee. So if you have personally guaranteed that loan and offered your personal real estate as collateral, yes, they can take your house. You pledged to make the loan payments, even if it meant dipping into your home equity, your last dollar in the bank, or your savings account. It is critical that you understand you have to repay the loan, even if your business fails.
60-day Demand Letter
If the money from the collateral doesn’t cover the debt, the lender submits a claim to the SBA, asking the agency to pay the guaranteed portion. That doesn’t get you off the hook though. Once the SBA decides to pay the guarantee, it sends you a 60-day demand letter. You have 60 days to respond or the account will be turned over to the Treasury for collection. Don’t panic (yet). First off, read that letter carefully. Then be honest with yourself: Is there any way that I can actually make this payment? You may repay or submit an offer in compromise.
An offer in compromise is an offer you make to repay the debt with a lump sum or payment plan for less than what you owe. If your lender and the SBA accept the offer, they will consider the debt resolved. You need to show that you cannot repay the debt in a reasonable period of time. The business is eligible only if it has ceased operations, sold all assets, and used the proceeds to reduce the debt.
If you don’t reply to the demand letter or don’t work out a deal, your account is transferred to the U.S. Treasury. Then the Treasury may garnish your wages, tax refunds and other government benefits. The Treasury may also sue you. This is where things get tough. The Treasury Department is a very large and powerful arm of government. This is not something that you want to mess around with. SBA disaster loans work a little differently: call the SBA and you may be able to work out a repayment plan. If you don’t, the SBA may seize collateral or take legal action.
Behind but Not yet in Default
Procrastination is never an option. The owners who end up worst off are the ones who stop paying the loan, become a chronic defaulter, and fail to open the mail. If you are behind but not yet in default, you still have room to move, and the first place to look is your own books. Look at all your revenue sources and expenses. Rank the expenses from essential to nonessential. Review your expenses carefully - sometimes you can cut costs or avoid creating new debts just by being more careful with what you spend. Be sure to review your cash flow forecasts. Identify an amount you can consistently save each month, and then test that amount against your loan’s repayment schedule. Does the new cash flow let you stay on track? Cutting expenses is a quick win, but it won’t get you all the way there. If you can trim your budget, you may be able to stay current on payments. If not, the reduction can at least ease the pressure. A business debt consolidation loan can help you replace several loans with one. Ideally, it will offer you better rates and terms.
Talk with your SBA lender before the loan goes into default. It’s important to be honest if you are having trouble making the payments on time or at all. Is early communication with the lender a good idea? Yes. Waiting until you’re already late puts the lender in a position where they think the worst. If you proactively reach out, you give them a chance to work with you. You should then describe your current financial situation and your plan for future payments. Your lender may be able to work out a plan with you, such as extending the loan term to reduce the monthly payments or offering interest only payments for a limited time. They may also allow you to defer your payments for a period of time. That doesn’t mean the loan is canceled or forgiven - it just lets the borrower pause payments until they’re back on their feet.
A little assistance can go a long way in getting back on track. A certified public accountant or attorney can help you review your finances and advise you on how to manage your payments. A business lawyer can help you negotiate repayment options with a lender, resolve collections matters, and draft an offer in compromise. A professional advisor can give you options that you might not have thought of. The best thing to do is find someone who can match your needs and your budget. And if you can’t afford an attorney by the hour, you should turn to SCORE. It matches small-business owners with free mentors. Search for one by location, industry or area of expertise (accounting, finance, lending, law).
There isn’t an easy way out of an SBA loan. Most require a personal guarantee, which means you’re personally liable even if the business closes. If you default, the lender can try to seize your business assets to repay the loan. Afterward, you may be able to submit an offer in compromise and settle the debt for less than you owe. In some cases, you can discharge SBA loan debt by filing for bankruptcy, but it depends on the type of bankruptcy and the circumstances surrounding the loan. Don’t hide from the problem. This is your chance to get organized. Start immediately with a list of everything. You are in a position to survive, but you will have to hustle.
