Your business has been unable to pay its loan, or has gone out of business entirely. If that loan was an SBA 7(a) loan, even though the business is no longer operating, the SBA debt still exists. What happens next is not a free-for-all. The SBA says that when your loan is guaranteed by the SBA, the lender has to follow its own ordinary lending rules and also follow the SBA’s rules and the loan approval letter. Those rules shape every step the bank takes, and knowing them tells you where you stand.
The point is that the bank must go as far as it can to collect the loan - try everything - before it can write the loan off to the SBA and ask the government to pay its guaranteed share. If the bank cuts corners and a loss results, the SBA can deny the claim altogether, or reduce it by the amount of the loss, a “repair.” That gives your lender a strong reason to follow the procedure to the letter.
Time to Accelerate a Loan
The first decision is acceleration. Acceleration means that the entire loan is due, immediately. When is it a good time to accelerate a loan? When it becomes clear to a prudent lender that, after making good faith efforts to help the borrower bring the loan current, the default cannot be cured. The call is up to the lender here, and the lender relies on its own internal policies for similar non-SBA commercial loans in making the determination. Closing the business is itself a default, but not a payment default, and the difference matters. Generally you must be behind on a payment for more than sixty days before the bank can ask the SBA to buy its guaranty. Acceleration is separate from requesting a purchase, the lender can’t actually request the purchase on the sole basis of a non-payment default. Even if the bank can’t turn around and hand your note over to the government immediately after the first payment is late, that doesn’t mean the bank can’t accelerate the loan. Usually if the bank can still pay off its own loan in full with the collateral it has, it won’t need to bother asking for the guarantee.
If the bank accelerates your loan, it enters liquidation status, and the SBA must be notified. And if your bank sold the guaranteed portion on the secondary market, they have to buy it back. Then a demand letter is sent to all the obligors on your loan, which means those who have agreed to pay the loan along with you, unless the law prohibits it. Lenders are supposed to take all the action in collecting the SBA loan, unless the SBA decides to take over collection.
Site Visit
When the loan is in default, the bank has to go visit your place. That’s how it decides what to do - whether to try to work it out with you, or try to repossess and sell your equipment - or even whether you might be able to save the business and get back on track. A business shutdown starts the clock fast. When the default is a shutdown, a bankruptcy filing or a foreclosure by a prior lienholder, they have a real hard clock to run, with only fifteen days to visit you. For a missed payment that stays uncured, the deadline is sixty days, and the visit should come sooner if the collateral could be removed, lost or dissipated. A site visit is generally not necessary if your loan is not secured by anything, or if the personal property collateral is worth less than $5,000 in total or each parcel of real estate is worth less than $10,000. Even so, the bank still has to fill out a report, explaining the reasons for not visiting you, or detailing what it found during the visit and what is the present condition and value of your collateral.
A site visit does not mean foreclosure and auction of your assets. A workout generally avoids the liquidation of collateral altogether. When a bank evaluates a business after it has defaulted, that evaluation is used, not surprisingly, to decide whether to re-organize, renegotiate or pursue out of court workout of the business or write it down and foreclose.
If you also owe the same bank on a line of credit or another loan, it cannot favor recovering its own loan over the SBA-guaranteed one. At the start of things, the lender should spell out if and how any of your other loans might affect the SBA loan, and make sure to document why those other loans don’t present an actual or apparent conflict of interest, so as not to risk a repair or denial.
Liquidation Plan
Before a bank decides to sell off your assets, it has to prepare a Liquidation Plan. That plan has to discuss a visit it made to your business to see what the assets are worth; whether you can come up with a plan to pay the loan and avoid liquidation; and what it expects to get out of selling the collateral if it has to go that route. The plan is also supposed to consider any other debts you might owe the lender, the methods of liquidation available and your ability to repay. Unless the loan was made under the Certified Lender Program, the bank does not need SBA approval of the plan before acting on it.
Lawsuits follow their own rules. As a general rule, SBA does not require prior approval for routine litigation, such as uncontested suits, non-adversarial bankruptcy proceedings, and undisputed foreclosures. That holds only while estimated legal fees stay at or below $10,000. But any time you have a dispute or the fee estimate is over that amount, the case is non-routine and the SBA must approve the bank’s Litigation Plan. The same is true where the lender might actually be interested in your debt differently from the SBA, or if the lender has some other unguaranteed loan to the same borrower. The bank also has to review the litigation plan whenever there is a material change in the litigation, including changes that may affect legal expenses.
There is a list, called the Servicing and Liquidation Matrix, that spells out which liquidation actions the bank can do on its own and which it needs SBA’s OK. The version in effect when the bank takes action controls, and the bank should keep the version it relied on in your loan file, and document its justification for each action it took.
For an owner whose business has closed, this sequence of deadlines, plans and reports is useful. Each step is a point where you can ask questions and talk about a workout or settlement. You should keep your eye on the ball. Be aware of what the bank is doing. It is allowed to take action based on its own judgment, but that does not mean the bank can do anything it wants. Nothing good happens when you just hand over the receipts and walk away. You need to stay present, push back gently, and use the deadlines as tools - not surrender.
