Will Not Paying SBA Debt In Full Bar Future Access to SBA Loan Programs?

This is a complex issue with no simple yes or no answer. There are a variety of factors that come into play when determining if not paying an SBA debt in full will prevent accessing SBA loan programs in the future. Let’s take a deeper look at the nuances involved.

The SBA’s Stance on Unpaid Debt

The SBA understandably takes a dim view of those who default on their loans. After all, providing small business financing is their mission – and defaults undermine that mission. According to the SBA’s website:

“If you default on an SBA loan, you may be barred from receiving future SBA loans or other Federal loan assistance such as contracting preferences or buying surplus Federal property.” [1]

So at face value, it would seem that not paying an SBA debt in full could indeed bar you from future programs. However, the specifics get more complicated.

It Depends on the Type of Default

Not all defaults are created equal in the eyes of the SBA. There are two main categories of default:

1. Failure to Pay Installments

If you simply miss some loan payments, this is not necessarily grounds for a permanent ban. The SBA expects lenders to work with borrowers who default on payments. For example, the lender might modify the terms or provide temporary relief.

Only if the payment default drags on without resolution would you risk being barred from SBA financing. Even then, it’s not automatic. The SBA reviews each situation individually.

2. Failure to Pay Upon Demand

This is a more serious type of default. If the SBA demands immediate and full repayment of the loan, failure to comply can trigger more severe consequences. This usually happens if the business shuts down or violates loan requirements.

Not complying with a demand for full repayment will more likely result in exclusion from future SBA assistance. But again, an outright ban is not guaranteed.

The Length of the Bar Depends on Circumstances

If the SBA does prohibit access to loans or other programs, the duration depends on the specific situation:

• For a first-time offense due to missed installments, the bar may be 1-3 years.
• For failure to pay upon SBA demand, the bar may be 3-7 years.
• If fraud or other criminal activity is involved, the bar could be permanent.
• Mitigating circumstances could potentially limit the bar period. For example, economic hardship due to a recession.

So even with an exclusion from SBA financing, it’s often not necessarily a lifetime sentence. The bar has an expiration date that depends on the reasons and context behind the default.

Your Future Creditworthiness is Key

The SBA emphasizes that the main purpose behind limiting access is to reduce financial risk and protect taxpayers. So if you can demonstrate creditworthiness after a default, you may still qualify for financing.

Factors that help prove creditworthiness include:

• Paying down other debts
• Maintaining current on other obligations
• Rebuilding your credit score
• Having solid business plans and projections

Strong evidence that you’ve become a good credit risk again could outweigh previous defaults with the SBA.

Appeal Options May Be Available

If declared ineligible for SBA financing, you may be able to appeal the decision. The SBA has an appeal process for administratively challenging exclusions.

Grounds for appeal often rely on showing that:

• The circumstances behind the default were beyond your reasonable control
• You’ve taken responsible steps to improve your financial condition
• Credible sources vouch that you are creditworthy again

Appeals don’t always succeed. But they provide an avenue for making your case to regain SBA access. Having a compelling story helps.

Sound Arguments Can Be Made On Both Sides

There are good-faith arguments on both sides of this issue:

In Favor of Barring Access

• SBA needs to limit financial risk and prevent repeated defaults
• Exclusion incentives borrowers to take obligations seriously
• Taxpayers shouldn’t subsidize chronic credit risks

Against Barring Access

• It punishes small businesses when they are most in need
• Temporary hardship doesn’t necessarily indicate long-term risk
• It conflicts with SBA’s mission to foster businesses
• Everyone deserves second chances after missteps

So reasonable people can disagree on the fairness and wisdom of barring borrowers for past defaults. There are merits to both perspectives.

The Bottom Line

While the SBA officially warns that unresolved defaults may limit access to future programs, the reality is more nuanced. Not all defaults are equal, and an array of factors determines the outcome.

With a responsible approach after defaulting, many entrepreneurs do eventually regain access to SBA assistance. So the lesson is not to assume default necessarily means you’re barred forever – but also not to take the risks of defaulting lightly.

Key Takeaways:

• The SBA may bar access to loans and services if you default
• But an outright ban is not automatic in all cases
• The bar may be 1-7 years depending on circumstances
• Rebuilding creditworthiness can help restore eligibility
• Appealing administratively is an option if declared ineligible
• Legitimate arguments exist on both sides of this issue
• Take a balanced approach – don’t assume the worst or take risks casually

The prudence of excluding borrowers who default requires weighing many interlocking factors. There are reasonable cases to be made both for and against such bars. Small business owners should understand these nuances when assessing the potential consequences of not being able to pay SBA debts in full.

References

[1] SBA Website on Default Consequences
https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-loan-forgiveness#section-header-10

[2] SBA Standard Operating Procedure on Debarment
https://www.sba.gov/sites/default/files/sops/serv_sops_50105a_0.pdf

[3] Analysis of SBA Loan Program Exclusions
https://smallbusiness.house.gov/uploadedfiles/nd18.pdf

[4] Examples of SBA Loan Default Appeals
https://appeals.sba.gov/

[5] Rebuilding Credit after Debt Default
https://www.experian.com/blogs/ask-experian/rebuilding-credit-after-defaulting-on-debt/