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Learn about programs and options that can assist struggling borrowers.
You may have taken out an SBA loan to get your business off the ground or through a down period, or to bring it to the next level of growth. However, things didn’t work quite as planned, and now your business is having difficulty making your SBA loan payments. The good news is that you have options.
The U.S. Small Business Administration (SBA) has programs for struggling borrowers. In some cases, you can get a loan modification or a settlement, but these options have ramifications.
If you are a small business owner in danger of defaulting on your SBA loan, here’s everything you should know:
Even though your loan is called an SBA loan, your lender makes day-to-day servicing decisions, not the SBA. If you’re struggling to make payments, you’ll need to plead your case to your bank.
A lender can typically offer two types of assistance: a modification or a deferment.
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When speaking with your bank about a loan modification or deferment, remember that you catch more flies with honey than with vinegar. In other words, be nice. It helps. While there are times when you should push back on the lender or take an aggressive approach, that shouldn’t be your default approach. Be courteous, return calls promptly and send the lender the information it needs on time. Making your lender’s life easier can never hurt.
Modifications and deferments are great for blips and hiccups, but when a business is bleeding cash with no end in sight, a deferment is akin to a Band-Aid on a broken leg – it’s not enough. In many cases, the only way to solve the problem is to shut down the business. That’s never an easy decision, but often it can be the right one.
Once your business closes, ideally, that would be the end of it. Unfortunately, it’s not. The overwhelming majority of SBA loans require personal guarantees, so even if your business is closed, the onus is on you to make good on the debt.
While the bad news is that you could potentially be on the hook for a significant sum of cash, the good news is that the government understands it can’t get blood from a stone. That’s why the SBA is willing to consider settlements, a process known as “offer in compromise” (OIC).
It’s important to note that an OIC is not a right and not everyone is eligible. A lengthy list of factors determines whether the SBA will consider some level of forgiveness, but in short, the borrower must demonstrate financial hardship and an inability to repay the debt over a reasonable period.
A settlement should bear a reasonable relationship to the amount recoverable through enforced collection. Essentially, the SBA compares your offer to the amount it thinks it could get if it sues you. Can it levy your bank account or garnish your wages? If so, keep that in mind when devising your offer. It helps if you don’t have assets that can be garnished, but that doesn’t mean you are off the hook.
Don’t lean too much on the point above. You can’t thumb your nose at the lender because all your assets are sitting in a 401(k) retirement account. To qualify for a settlement, you must demonstrate financial hardship and a lack of ability to pay. This means that even though the SBA can’t force you to crack open your piggy bank, you may need to do it yourself if you hope to settle.
The amount you settle for will be directly tied to your personal financial situation. No arbitrary percentage will make the bank and the SBA say yes or no to an offer. They will require full financial disclosure, including a special personal financial statement (SBA Form 770), tax returns and bank statements.
If you fail to work out a deal with your lender or the SBA, the U.S. Department of the Treasury will base its settlements on an arbitrary percentage. Also, settlements are based on what you can afford, not what will be convenient for you, so don’t expect it to be easy or cheap.
While settling your debt is a positive thing for your finances and psyche, it’s not all rainbows and unicorns. These stipulations are worth knowing about:
If you don’t respond to your demand letter, the SBA sends your debt to the Treasury Department for collections under the Treasury Offset Program.
If your debt goes to the Treasury Department, there are several ways it can collect your outstanding debt:
Since your loan belongs to the federal government, there’s no statute of limitations on how long your loan can be in collections, and the government doesn’t need a judgment to institute garnishment. You might be able to settle with the Treasury Department, but it’s not likely. And if you do, it’ll be for much more than what the SBA would have settled for.
Defaulting on your SBA loan should be a last resort. It often means your business is in grave danger. Here are some ways to avoid the problem:
If you’re sure you’ll receive sufficient revenue in the short term (within the year), consider taking on a bridge loan or getting cash from credit card receivables financing or invoice factoring. You might also want to look into refinancing your SBA loan with an alternative lender with more flexible repayment terms.
While nobody takes out an SBA loan expecting their business to fail, it happens every day. Is it a fun situation to navigate? Decidedly not. But the good news is that if your business begins to struggle and you’re contemplating shutting your doors, settling your SBA loan might be an option.
Jennifer Dublino contributed to this article.