What is an SBA Loan? What Happens if You Default on it?
Someone recently asked us a series of questions about what happens if you default on an SBA loan. Here are our answers from Lendio’s president, Levi King:
What is an SBA Loan?
SBA loans are loans to small businesses that are unable to get a business loan through normal lending channels with reasonable terms. The program operates through private-sector lenders that provide business loans, which are guaranteed by the Small Business Administration (SBA).
Are SBA loans always personally guaranteed?
Yes on the vast majority of SBA loans. The only rare exception would be businesses with tons of collateral, lots of time in business, and super clean financials.
Who collects defaulted loans, the lender or the government, or both?
The lender collects. The SBA just guarantees the loan to the bank. The lender collects what they can, and then they can make an insurance claim for the percentage of the loan covered under the insurance, but not recovered by their collection efforts.
What is the collection process like for defaulted SBA loans?
Just like any other bad business debt that is personally guaranteed, first they’ll foreclose on any collateral that was put up to secure the loan, then they’ll sue the business for default, then they’ll sue the guarantor(s) for default, and they’ll get a judgment against the business, guarantor(s) or both.
What might borrowers expect?
Depends on each state’s laws, but in general they will face 25% wage garnishment, they can intercept any dividends paid out of corporations the individual has ownership in (even other businesses), they can seize bank accounts, and other physical property collateralized by the loan and/or awarded in a judgment.
Can SBA loans be discharged in bankruptcy?
Yes. Once you’ve Bankrupt out of one SBA loan, you can’t get approved for another one.
Are there restrictions on what types of SBA loans can or cannot be discharged?
Can business owners negotiate settlements on SBA loans?
Yes, just like any other type of debt that goes delinquent.
How can you negotiate settlements on SBA loans?
Go 90+ days late on the loan, and either negotiate directly with the lender or use an attorney. You will be 1099’d for the forgiven debt and probably barred from SBA loans in the future (if the SBA suffered a loss).