Is Your SBA Loan in Default? Forgiveness Is Possible

What happens if you default on your SBA loan?

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Defaulting on an SBA loan can have serious consequences for both your business and personal finances. The process depends on your loan type and circumstances, but here’s what you can generally expect:

• Your loan becomes delinquent. If you miss a payment, your SBA loan becomes delinquent. Your lender will usually reach out about the missed payment, and you may be able to work out a way to catch up. However, if you continue to miss payments, your loan could eventually go into default.
• The lender may seize collateral. If your loan goes into default, your lender may take steps to recover the money owed, including seizing and selling assets pledged as collateral. These could include business property, equipment or inventory. If you signed a personal guarantee, you could also be held personally responsible for unpaid debt, potentially putting your personal assets at risk.
• The SBA may become involved in collection. If you default, your lender may ask the SBA to honor its guarantee on the loan. Depending on the loan and how the liquidation process unfolds, the SBA may pursue repayment of any remaining debt.
• Your debt may be referred to the U.S. Treasury. If your debt remains unresolved, the SBA is generally required to refer eligible delinquent federal debt to the U.S. Treasury Department for collection. Treasury can withhold eligible tax refunds, garnish wages or refer cases for legal action.

Note that the steps above apply mainly to SBA loans made through banks and other lenders, including 7(a) loans. Disaster loans are different. If you have an Economic Injury Disaster Loan (EIDL), for example, you’ll work directly with the SBA rather than a bank.

The sooner you address missed payments, the more opportunities you may have to work with your lender or the SBA and avoid further financial trouble.

Does the SBA forgive loans?

Most SBA loans aren’t eligible for forgiveness, including loans issued through the agency’s popular 7(a) and 504 programs. However, the Paycheck Protection Program (PPP), established during the COVID-19 pandemic, allowed qualifying borrowers to have some or all of their loans forgiven.

The SBA’s PPP forgiveness guidelines gave borrowers five years to apply, starting from the date their SBA loan number was issued. With the program having ended in May 2021, those deadlines have generally come and gone. If you didn’t get your loan forgiven, you’re still responsible for paying back what you owe. If you’ve fallen behind on payments, your loan could be in default and your debt may be referred to the U.S. Treasury for collection.

Although forgiveness generally isn’t available for other SBA loans, borrowers struggling to make payments may qualify for other forms of relief. An SBA representative we spoke with recommended contacting your lender (or the SBA, if you have an EIDL) to discuss your options, which vary by loan type:

• 7(a) loans: Depending on your circumstances, your lender may be able to defer payments or extend your loan’s repayment term.
• 504 loans: These loans typically involve a third-party lender and an SBA-backed loan through a Certified Development Company (CDC). The CDC portion generally has more restrictions on modifying loan terms, although payment deferments may be available. Your third-party lender may offer additional options for its portion of the financing.
• COVID-19 EIDL loans: If you’re having trouble keeping up with your payments, the SBA may let you pay 50 percent less for six months. To qualify, your loan must be less than 90 days past due, and you’ll need to meet the SBA’s other eligibility requirements. You can request this relief through the SBA’s loan portal. However, if your loan was originally approved for more than $200,000, you’ll need to email COVIDEIDLServicing@sba.gov instead. Keep in mind that interest will still build up while you’re making smaller payments, so you’ll have a larger final payment when your loan term ends.

Offer in Compromise

If your business has closed and you can’t repay your SBA loan in full, you may be eligible for a settlement through the SBA’s Offer in Compromise (OIC) process. An OIC allows qualifying borrowers and guarantors to settle their debt for less than the outstanding balance, generally after the collateral securing the loan has been liquidated.

The SBA considers several factors when reviewing an offer:

• Your business has closed and its assets have been liquidated. An OIC is generally considered after a business has ceased operations and available collateral has been liquidated. The requirements may vary depending on your SBA loan program and circumstances.
• You provide a complete financial picture. Borrowers and guarantors seeking a settlement must disclose their financial circumstances, including income, debts and assets. This typically involves submitting SBA Form 1150 (Offer in Compromise) and Form 770 (Financial Statement of Debtor) or other required financial statements. The SBA uses this information to determine whether collecting the full amount is realistic.
• You can make a reasonable settlement offer. Although you may not be able to repay the entire loan, you’ll need to propose an amount you can realistically pay. The SBA may consider factors such as:
  • Equity in your home or other real estate.
  • Savings and other available funds.
  • Vehicles, investments and other assets that could be sold.
  • Your current income and household financial circumstances.
  • Your future earning potential and ability to make payments.

For 7(a) and 504 loans, contact your lender or Certified Development Company (CDC) about submitting an offer. Any settlement requires SBA approval. It’s best to explore this option before your debt is referred to the U.S. Treasury, since the collection process changes after referral.

If your offer is approved, you’ll need to fulfill the settlement terms before your debt is considered resolved. An OIC isn’t guaranteed, and the SBA may reject an offer if it determines that more money could reasonably be recovered.

COVID-19 Economic Injury Disaster Loans (EIDLs) are a different story. The SBA says these loans can’t be forgiven, and borrowers shouldn’t count on being able to settle for less than they owe. If you’re having trouble making payments on your COVID EIDL, your best bet is to contact the SBA directly and find out what options you have.

How to avoid defaulting on an SBA loan

If you’re struggling to make your SBA loan payments, the best approach is to address the problem before your loan goes into default. The sooner you take action, the more options you may have.

Start by contacting your lender (or the SBA, if you have an EIDL loan) to explain your financial situation and ask about possible repayment arrangements or temporary payment relief. You should also take a close look at your business finances to see where you can make changes. Cutting business expenses, improving cash flow or restructuring other debt could help you free up money for your loan payments.

You don’t have to figure everything out on your own, either. The SBA works with organizations that provide free or low-cost business counseling and guidance, including:

• SCORE: Connects business owners with volunteer mentors who can help them work through financial challenges, improve their business plans and explore ways to strengthen operations.
• Small Business Development Centers: Provide business advising and assistance with financial management, cash flow planning and other challenges.
• Women’s Business Centers: Offer training, counseling and business development resources, particularly for women entrepreneurs.
• Veterans Business Outreach Centers: Help veterans, service members and military spouses with business training, counseling and other entrepreneurial resources.

You can find nearby organizations through the SBA’s local assistance page.

Financial difficulties can happen to any business, but ignoring missed payments can make the situation worse. Staying in touch with your lender or the SBA, reviewing your finances and seeking help early can give you a better chance of avoiding default and protecting your business’s credit and assets.