What Happens if I Default on a SBA loan?
What happens if I default on a SBA loan? If you’ve taken out a Small Business Administration or SBA loan and are not able to make your monthly payment it is undoubtedly creating a lot of stress and distracting you from your core task which is to own and operate your business. What can I do if I have to default on my SBA loan is a question I get asked quite often and there are different answers to the question as each situation is unique. It’s certainly not an easy thing to do and how successful you will be depends on your situation and successfully working with your SBA lender.
Goals of the SBA borrower
An SBA loan typically requires the borrower to provide both collateral and personal guarantees to secure their SBA loan. These guarantees are intentional as the full faith and credit of the US taxpayer is behind every loan and it’s the SBA that’s responsible for making sure that the SBA loan process does all it can to make sure any loans are re-paid.
If a borrower has provided the necessary guarantees and wants to get out from under their SBA loan obligations their goal is to avoid any of the following:
- No business bankruptcy or disruption
- No personal bankruptcy
- Have all the liens removed from the business so the assets can be transferred to the new owner?
- Have all the liens stripped off personal residence so the SBA loan borrower does not lose their residence?
Helping SBA borrowers
Those SBA borrowers that are best helped tend to meet some of the following criteria.
- The business is carrying too much and unable to trade its way out of the debt without risking the complete collapse of the business.
- The Fair Market Value of the business is greater than the amount of the SBA loan.
- The Fair Market Value of the business is greater than the Orderly Liquidation Value of the business.
- The amount of debt is greater than $150,000 but less than $10,000,000
- The business owner has personal guarantees in place.
- The gross revenues of the business are larger than $150,000 but less than $10,000,000.
Four-step action plan
To have the borrower get out from underneath their SBA loan there is a need to put a four-step process in place and this is as follows:
- Identify an investor or new owner for the business
- Get the SBA lender to agree to an asset sale at an Orderly Liquidation Value
- Prepare and present an Offer In a Compromise package, according to SBA regulations to the SBA lender
- Negotiate with the SBA lender to ensure acceptance of the buyer’s offer, settle the remaining balance of the SBA loan, and remove the lien from the family home
A Success story of one SBA borrower
There is no one-size-fits-all, that is, what works in one situation may not work in another. However, here’s an example of how one business owner was helped.
- The business was a Medical Spa that was purchased in 2007 with significant bank loans and a lien on the family house.
- 2007 & 2008 so the start of the recession and so these were barely break-even years for the business.
- 2009 was a disaster as the business losses totaled around $165,000 with the loans not being serviced and ballooning to over $515,000 with the owner of the business wanting to get out by selling.
- In 2010, the business was valued and if sold, would leave a deficiency of close to $275,000 if the business would even sell …
- The business owner’s solution was to work with an intermediary by finding a buyer and as part of the exit process, negotiate and satisfy the lender’s requirements and put the business on a healthier and more sustainable footing.
If you own a business, your situation fits into some of the above parameters and you would like to know if you can get out of debt and protect your guarantees and assets when consulting with Andrew Rogerson in Sacramento, California.