If your business took out an SBA loan, the loan was backed by the federal government, and you have a repayment schedule in place. What do you do if things go badly, and you fall behind on the payments? If you don’t make the payments, you’re in default. That’s really, really bad for your credit. And if you want to borrow money again in the future, it might be harder to do so. To collect on an SBA loan, the government has a wide range of tools, including wage garnishment and withholding any federal tax refunds from the borrower. These will be utilized until the loan is fully repaid.
When you run into financial trouble, it’s extremely tempting to simply move on to the next job, the next deal, or the next company. But ignoring an SBA loan is not an option. There is an alternative to default, and it runs through the SBA itself: an offer in compromise. In this case, you offer an amount you can afford and if they accept, it counts as full repayment. Everything else is written off. You’ll be starting over fresh. The request is made on SBA Form 1150. Here is what goes into it, and what has to happen before you send it.
Close Down Your Business
This is the part nobody wants to hear: you will most likely need to close down your business and come up with a plan to sell all of your business assets. Nearly all SBA loans are secured by the business’ assets. In other words, you’ve probably already given the lender a lien against every single item you have in your store, trade secrets, equipment, inventory, and any other assets of your business. Also, did you form a corporation or an LLC (or some other business entity that prevents personal assets from being seized by your creditors)? If so, your personal assets may be safe from collection actions. However, if you are a sole proprietor, no such protection is available. In such a case, the lender can go after your vehicle, personal items, valuable collections, etc. but NOT your primary residence.
Some owners will work with their lender to have the bank value the assets of the business and take ownership of them. This value will be applied to the balance of the loan. Then and only then, once the business is shut down and the remaining assets have been liquidated, you will send in your offer in compromise to the SBA. Waiting to do this means the balance listed on the form will be accurate. If you still have assets that you could sell and apply toward the balance, the offer could be rejected.
Form 1150
The first part of Form 1150 is what you think of as the “Cover Page”: It may surprise you to discover that the form also asks you to provide the lender’s address. When you get a small business loan through the SBA, the loan is guaranteed by the SBA, but the money comes from a lender, so there are two addresses on the form, yours and the lender’s. After that, the form requests your SSN, along with the loan number and your loan balance. The form comes with instructions for completing it. Read those instructions before beginning.
The heart of the form is the offer itself. In this section, you specify the amount you are offering. That is, the amount you are asking the SBA to accept in return for full settlement of the debt. You don’t want to ask for too little, because the SBA will not accept an unreasonably low offer. How do you come up with that number? You want to come up with a number that is high enough to give the SBA reason to accept it, but not so high that it makes the settlement unaffordable for you. The SBA is looking at what it thinks it can realistically collect from you within a reasonable period of time. That is how it evaluates whether or not to accept an offer.
Section three is where you explain why you can’t pay the whole amount. That could be because your finances are shaky or the business you started with the SBA loan money didn’t perform as well as you planned. You need to attach financial statements, business expenses, and any other supporting documentation that will help make your case for acceptance of this offer. This is where the business owner can tell their story. Tell it plainly. Share what happened and why it did not turn out as planned. Explain the current situation. Share any other relevant information. However, the SBA is not so interested in excuses as it is facts. So make sure your proposal is supported by solid documentation.
Once everything is filled in, you sign the form and date it. There’s a notice on the bottom which says, in effect, “Hey, this offer isn’t automatically accepted until you get written approval from the SBA.” Everything on the form must be true and accurate. Knowingly providing false or inaccurate information on Form 1150 can result in up to 5 years in prison or a fine of up to $10,000. So don’t change numbers on the form to make your financial situation look worse.
The SBA Denies the Offer
So what happens if the SBA denies the offer? The most frequent reason is the SBA believes it can recover a larger amount of money within a reasonable period of time. So you see why it is important to make a fair offer, one that is favorable to you and to the SBA. If the offer is denied, you do have the right to appeal. Keep in mind, though, that you will need to make a better offer or provide more information to convince the SBA why your offer should be accepted. A rejection is not the end of the world.
At the end of the day, the form itself isn’t complicated. The hard part is everything you do before and after. Close the business. Deal with the assets. Fill in your details and the lender’s details. Make a realistic offer. Back up your claim with paperwork. Sign it. Wait for approval in writing. Be honest. There are penalties for lying. If they reject it, you can appeal. Make a stronger offer or add more details. Don’t leave it too late. Find a pro to review it before you submit. There’s nothing worse than acting at the eleventh hour and hoping for the best.
