Defaulting on an SBA Loan

What Happens If You Default On Your SBA Loan?

Defaulting on any loan, especially an SBA loan is never your plan. The Small Business Administration Loan is designed to kickstart small businesses using a loan that is highly beneficial to the start-up while also providing the lowest risk to the lender. The SBA requires that small business meet a special set of requirements before even granting them the loan.  The SBA is aware that even some of the most stable and successful businesses can fall upon difficult times and it is not uncommon to default on an SBA loan. In the past, one out of six SBA 7(a) loans were not paid back between 2006 and 2015, they also There are several ways to handle a defaulting SBA loan, depending on your individual situation and how late in the process you are assessing the situation. While the default will affect the SBA, it will initially be dealt with by the original lender. Despite the fact that the lenders themselves are at the lowest level of risk, the SBA guarantees the lender a return of about 85% on the loan, regardless of payments.

The primary goal when dealing with a defaulting SBA loan should be to keep the conversation between yourself and the original lenders. A quick trip to your bank or lender’s office and a meeting with a consultant you are familiar with is much easier for you compared to waiting until the SBA has to contact you directly. The lender will typically notify you that you are late on a payment after a ten-day grace period and in danger of defaulting, in any case, it is best to contact your lender before they contact you to let them know you are making efforts to make the payments. If it does look like you are about to have to default on your SBA loan, be sure to discuss an alternative repayment plan with your lender if possible, this may consist of a restructuring of your current payment plan or interest-only payments for a certain period of time.  If one of these alternative payment plans is agreed upon, you will not, therefore, be defaulting on the loan.

    What if Defaulting is Inevitable?

However, if the loan payments cannot be restructured to a plan that you can afford to meet, the lender may accept personal or business assets in return for a portion of the loan. Each lender has slightly different policies and procedures when collecting on loans when in at risk of defaulting and dealing with late payments, as lenders are allowed to charge a late fee, some have the policy to do so. The lender would rather attempt to collect from you than call in the guarantee from the SBA themselves. If there is no conceivable way to recover their loss on the loan from you directly, the lender will contact the SBA to report the loss amount. The SBA will cover up to 85% of loans $150,000 or less, and up to 75% of loans over the amount of $150,000. If the claim is submitted to the SBA from your lender, the SBA may take further measures to ensure that the losses on the loan are paid back, this may include garnishing wages and freezing bank accounts of the borrowers.

It is important to remember that there are options to consider if you are struggling before you are forced to default on your SBA loan. It is vital to yourself and your business that you stay in contact with your lender and communicate successfully. If necessary, borrowers also need to be ready to sell or close their business if it means successfully paying back the loan. Even if your lender does have to contact the SBA and you have failed to pay the full amount, it is possible to settle on a lesser amount with the SBA through an offer of compromise, in which case you will have to seek more specialized legal assistance. In any stage of this process, please consider contacting one of our specialized financial advisors to assist you with the process and provide further guidance.