An SBA loan default is serious, and it starts small. It starts with a payment that you are a few weeks late on. It happens. We get calls like this all the time. The financial situation of a small business can turn very sour very quickly.
SBA loan default occurs when the borrower fails to meet some of the legal loan terms. Before that happens, though, the loan will usually be considered delinquent. It’s a small difference, but it’s important to know the distinction between the two. A loan is delinquent when you miss a payment for even a single day. Being delinquent does not mean you are in default, but it’s a sign that something is wrong. Things can take a turn in a hurry once you are in a delinquent position.
Once the loan is delinquent, the lender may start to charge late fees or apply penalties depending on the loan terms. Both delinquency and default can have a huge impact on your credit score. If you do not quickly resolve a delinquent loan, it is easy for the situation to escalate into default. A delinquent loan is a warning flag. So you really need to work with your lender to avoid the default situation.
When Exactly Is an SBA Loan Considered in Default
When exactly is an SBA loan considered in default? The answer depends on the specifics of the loan agreement. If the loan remains delinquent for a certain amount of time without any effort to resolve the balance, the lender can declare it in default. Lenders generally wait 90 to 120 days before labeling a delinquent loan as in default, and then they begin standard collection procedures, according to the agreement you signed. Never let it slip to 90 or 120 days, whatever the details. Call your lender today.
While the loan is delinquent, the lender will try to reach you by phone or email. Many of the same federal laws that protect consumers in debt collection situations don’t apply to business loans. State laws and policies of the specific lender will vary. The most important thing is to try to communicate with your lender. Avoiding them will just make the situation worse. Make sure you respond promptly to phone calls, letters and emails. Remember, you need to get ahead of your lender and be talking to them right away.
Once the loan is in default, the lender can take possession of any collateral securing the loan. If the business has failed and the remaining business assets aren’t enough to repay the loan, then the lender will likely invoke your personal guarantee. The lender may also demand that you sell off your assets, or get a court order to withdraw money from the business accounts.
60-day Demand Letter
When you don’t pay your defaulted loan, your lender will submit a claim to the SBA for the guaranteed portion of your loan, minus whatever they collected through other means. The SBA pays the lender, but the process isn’t over. The SBA will now contact you to request repayment, per the terms of your loan agreement, with a 60-day demand letter. If you don’t respond within 60 days, the case will be forwarded to the Treasury Department. Please read the details of the notice carefully. You still have options.
If you can’t pay the SBA back for its loan, you can try to settle it with an offer in compromise. You can do this as a reduced lump sum payment, or offer a repayment plan. You must demonstrate to the SBA that you cannot repay the debt within 60 days. That means you must provide copies of your tax returns, evidence of your business and personal assets, records of income, and a report of business expenses. If you can prove your financial inability to repay the loan, the SBA might accept an offer even if it’s for less than you actually owe. Be as honest as possible.
If you don’t respond to a 60-day demand letter, or if you propose an offer in compromise that the SBA rejects, the SBA will transfer your case to the U.S. Treasury Department. Treasury can garnish your wages, withhold future tax refunds, or file a lawsuit against you in civil court. It can be very aggressive in its collection methods, especially if you don’t resolve the matter by the deadline you’ve been given. While it is still possible to settle at this stage, it is much more difficult. It’s always best to try to negotiate with the SBA before it takes the default to Treasury. Bottom line, if you need help with your SBA loan, get it now. Don’t wait to get into trouble.
The Best Way to Avoid Default
The best way to avoid default is to pay the loan on time and meet the other requirements of the loan. If you find it impossible, there are other ways to reduce the risk. First, review your finances before you miss a payment. You may be able to cut expenses and free up money for your loan payment. Second, run cash flow forecasts. They won’t be perfect, but they’ll give you a glimpse of your future finances. That way, you can make changes now to avoid the risk of default.
If you’re having trouble making your SBA loan payments, your first step should always be to contact your lender. Discuss the issue head-on before it becomes a more serious problem. It takes courage, but it’s what makes things better. If you maintain transparency about your situation, you might be able to find a solution together instead of waiting for the loan to go into default. They might help you create a new, more realistic payment plan, or even help reduce the overall cost of the loan. SBA partner lenders almost always prefer to work with borrowers since they lose money when a loan is defaulted. Any arrangement will probably be more favorable to the lender, but it should be better than defaulting. If the lender offers you a repayment plan, stick to it. Don’t miss any more payments.
You might also bring in a professional. Though this won’t be the most cost-effective solution, it may be a wise one. A professional can bring a calm, authoritative hand to a situation that may be boiling over. It might be a good idea to hire a Certified Public Accountant or other financial expert to help you sort through your finances and find ways to cut your expenses and continue making loan payments. If you are already delinquent or in default on your loan, you can hire an attorney to negotiate with your lender and the SBA on your behalf. The attorney can also draft an offer in compromise.
Defaulting on an SBA loan is a serious issue, but it’s not the end of the world. While it’s a stressful time, it’s possible to recover after you’ve settled the debt. If you find yourself in that situation, talk with the lender first. Try to work something out. If that doesn’t happen, you may be able to settle for less with the SBA. If not, the Treasury Department can come after you, but there is still hope for a settlement, even if it’s much harder to reach by then. It’s in your best interest to do what you can to avoid defaulting, to keep communication channels open, and to keep improving the financial health of your business.
