Can an SBA loan be forgiven?
What happens when the unthinkable happens and your small business, unfortunately, goes belly up, can an SBA loan be forgiven? Let’s find out! When you’re on the process of growing a startup business, getting funding from SBA might sound like heaven-sent. When the agency backs up your idea, it would seem like you’re finally towards the high road. However, a little bump in the road might interfere your capacity to pay back the loan. You might wonder what happens when your business revenue doesn’t meet your loan bills. Will SBA loans be forgiven? Find out the answer by reading on.
SBA backs loans through its partner lenders. Without the agency to guarantee the loans, these lenders will most likely turn their backs on small business owners. All thanks to the methods of SBA limiting the risk of default, more lenders welcome borrowers with excellent rates compared to the open market. Even though the SBA has an efficient process to filter qualified candidates, borrowers still default on SBA loans. As a federal organization, the agency takes extra measures to handle delinquent loans properly. In the end, will the SBA loan be forgiven?
Who handles loan forgiveness, the SBA or partnering banks?
When small business owners face the unfortunate situation of loan default, the SBA decides if they can have loan forgiveness. Both the SBA and the partner bank will be involved in this matter. The SBA only steps in after the bank has attempted to collect on a defaulted loan and failed.
How does SBA loan forgiveness work?
The SBA will buy back the 50%-75% of the loan that the agency guaranteed. During this point, they will act on collecting the money from the borrower. Once there’s a settlement agreement, forgiveness follows. Once the agency pays the bank, the borrower has the option to make arrangements to repay the loan as much as they can. The SBA will forgive the remaining balance.
What happens during the repayment agreement with SBA?
The borrower is given the opportunity to propose a reasonable amount that they can afford during the SBA loan settlement negotiation. The SBA can either accept or reject the proposal. Borrowers who opt to request for the amount that’s sufficient to pay back the SBA loan promptly has the best chances to have the resettlement agreement sealed. The agency doesn’t want borrowers to overextend the resources of the borrowers and miss paying the loan again.
If the borrower refuses or can’t repay the loan, the agency will take further actions. They could seize assets from the business’s personal guarantor. For starters, the SBA will submit proper documents to the US Treasury Department.
How does the US Treasury Department collect SBA loan debt?
- Treasury Offset Program (TOP)
If you’re expecting an income tax refund and you have a delinquent federal loan, the funds will flow toward clearing your SBA loan debt.
The SBA and other federal agencies will send delinquent loans to “Fiscal Service.” The department could take several actions to collect the debt like the following:
- Hiring private debt collectors
- Sending collection letters to the debtor
- Making payment arrangements
- Garnishing wages
- Forwarding information to credit reporting agencies
- Escalating debt to the Department of Justice
- Withholding income tax returns
What are the consequences of SBA loan forgiveness?
As SBA loan forgiveness can help reduce debt, several pitfalls await for the business owner such as the following:
- The business will be dissolved. Liquidating all business property is necessary. Using these resources to reduce the delinquent debt follows.
- Negative impact on credit records for businesses with SBA loan forgiveness. Note that personal or business credit reputation can be at stake in this matter as well.
- If you’ve signed as a guarantor on a business loan that’s been delinquent, your personal lending ability can be at stake too.
- Borrowers that have SBA loan forgiven can have trouble getting business loans especially those on the federal level in the future.
Deciding to push through a start-up business is such a brave and liberating act. Securing funding with the SBA is a fantastic way to have finances during the early stages of your business. The future will look bright, but in the world of business ventures, it can also go dark in an instant. Before you say yes on business funding, make sure to think about all the options. Can an SBA loan be forgiven? Yes, but that won’t solve all your worries with your business and financial resources.