Facing an SBA loan default can be a daunting experience, but you aren't alone. In February 2025, a Senate Committee hearing was held to discuss the ballooning rate of early defaults in the SBA 7(a) loan program. In 2024, over 1% of small business owners defaulted on their SBA loans in the first 18 months.

If your small business is at risk of defaulting, or has already defaulted on your SBA loan, understanding the implications and exploring available options can provide a path forward. This guide will cover what happens if you default on an SBA loan, managing SBA loan defaults, and your options for next steps.

What is an SBA loan default?

An SBA loan default happens when a borrower has continually failed to make the agreed-upon payments, and hasn't come to any resolution with their lender. Defaulting on an SBA loan, or any loan, can have negative impacts on your business, and potentially lead to steep legal or financial consequences. 

If you're worried you may not be able to make your agreed-upon payments, reach out to your lender to explore your options before the situation progresses to a default.

The difference between SBA loan default and SBA loan delinquency

As mentioned above, a default happens when you missed your payments and haven't worked things out with your lender. However, an SBA loan doesn't go into default immediately. 

Before this stage, usually when you first miss payments, your loan will be classified as delinquent. Your lender will begin to reach out over missed payments. After a period of time, on average three to four months, your loan will default if you have not paid your past due amount or contacted your lender.

What happens if an SBA loan goes into default?

Once an SBA loan goes into default, things get serious. Although time frames will vary depending on lender and loan terms, usually a lender will issue a formal demand letter for the amount due. You will then have 30-45 days to pay the entire amount.

Failure to do so means the lender can use several other measures to collect the amount due.

Asset Seizure

Any collateral that you used to secure your loan, such as business bank accounts, real estate, inventory, or equipment, can be seized by the lender and sold to recoup their losses.

A lender can also seize and sell your personal assets if you’ve filled out an SBA loan personal guarantee. The personal guarantee form is required for most SBA 7(a) loans from anyone who owns 20% or more of the business. This also applies to any other owners or individuals who signed personal guarantees.

Depending on asset seizure specifics, or if the assets seized are not enough to cover paying off the loan in full, you may face lawsuits at this stage.

Lender files with the SBA

The lender will also file a claim with the SBA for the guaranteed portion of the loan, and turn the remainder over to the SBA, who will take over attempts to collect on the loan. Generally, a borrower must be in default for more than 60 calendar days before a lender can put in a loan purchase request with the SBA.

SBA takes over account and attempts to collect

The SBA will repay the lender the guaranteed portion of the loan to recover their losses, but will continue to attempt to collect payment from you. In most cases, the SBA will issue a 60-day demand letter, which details that you must respond within 60 days, or your account will be turned over to the U.S. Treasury Department. At this point, you can repay the loan, or submit an offer in compromise.

Submitting an offer in compromise (OIC) is an option when you have genuine financial hardship. It's a settlement that the SBA will consider for eligible businesses, but it's not guaranteed, and the amount of forgiveness that the SBA will consider is subject to a number of factors.

The U.S. Treasury will step in

If payment and settlement is not reached, the SBA can contact the Treasury Department with either a notice to the Treasury Offset Program (TOP) or an Administrative Wage Garnishment (AWG) notice to an employer. With the former, the TOP allows the government to take a portion of federal wages or social security benefits that you're owed, as well as seize vendor payments and/or income tax refunds. 

An AWG allows wages to be garnished for up to 15% of disposable income (net pay after deductions). There is no statute of limitations for either TOP or AWG methods, and they will remain in place until the debt is paid, including interest and collection fees.

Communicate with your lender if you can't pay back a small business loan

Taking immediate action is crucial when you face a situation where you can't pay back a small business loan, as the consequences can escalate rapidly. Communicating clearly and transparently with your lender helps you both explore alternative solutions, such as restructuring payment terms, or arranging a temporary deferment until you can resume payments.

Maintaining communications also demonstrates your goodwill, which can help prevent the situation from progressing to more drastic collection methods.

Usually, a lender can offer two main types of assistance in this situation. Loan modification, or loan deferment, to help you through the situation until your business is in a better state to manage payments.

Loan modification

A loan modification refers to changes to the terms of the loan. For example, your lender could give you a term extension to push back the loan maturity date. This approach can provide immediate relief by reducing the size of your periodic payments, which can ease the cash flow burden on your business. 

Lenders may temporarily or permanently alter interest rates, which can lower repayment costs. Some lenders may also consider offering a temporary reduction in interest payments, with any deferred amounts added to the loan balance. However, it's important to thoroughly discuss these options with your lender to understand the long-term implications. Modifications can extend the loan duration and affect your future business financial planning.

Loan deferment

A loan deferment can work as a short-term solution for businesses in a difficult period of cash flow. Typically, a lender can defer your loans for repayment for three, six or sometimes even twelve months.

Your lender often provides you with short-term solutions to bridge financial hardship when it comes to paying your SBA loan back. If this is simply not an option, then these solutions will only delay the inevitable. In this case, if you cannot repay your loan, then proactively pursuing an Offer in Compromise with the SBA is a route to settle your debt for less than the owed amount.

The bottom line

Defaulting on an SBA loan can have serious repercussions both personally and professionally. However, by understanding the default process and proactively seeking solutions, before the situation progresses too far, you can navigate these challenges more effectively. 

Explore all options, maintain communication with lenders, and seek professional assistance when necessary. These steps can lead to a resolution that aligns with your financial and business goals, helping you regain control and stability.

To learn more about managing SBA loan defaults and discovering potential pathways for debt relief or forgiveness, consider reaching out to financial advisors who specialize in small business loan challenges. Your journey to financial stability and business success is not one you have to navigate alone.