What happens if you default on an SBA loan?

Because loans from the US Small Business Administration (SBA) are some of the most popular sources of financing available, it’s important to understand what happens if you default on an SBA loan.

First, it’s important to understand the unique structure of these loans. The SBA is a government agency dedicated to providing loans and other resources to small business owners. Their top priority is assisting disadvantaged groups such as minorities and women.

When the SBA approves you for a loan, they aren’t actually sending you any money. They serve as a mediator in the transaction, connecting you with a lender that is willing to provide the financing. In addition to this matchmaker role, the SBA also guarantees a portion of the loan. This assurance lowers the risk for lenders and makes them more willing to work with you, offering better rates and repayment terms.

Here’s a quick look at the 5 popular SBA loans:

1. SBA 7(a) Loans: More small business owners seek SBA 7(a) loans than any other product offered by the agency. These loans are relatively easy to qualify for, thanks to the aforementioned guarantee. Additionally, they have very few limitations on how you can spend the money.
2. SBA Express Loans: If you require money in a shorter amount of time, an Express Loan could be a solid option. They’re basically streamlined 7(a) loans that involve less paperwork and faster funding timelines.
3. SBA 504 Loans: These loans are one of the most purpose-specific products offered by the SBA. They’re intended for the expansion of business operations, so projects like constructing new facilities, purchasing land, or upgrading machinery would all qualify.
4. SBA Disaster Loans: When disaster strikes, these loans can be used to repair and replace personal property, machinery, equipment, inventory, real estate, and other business assets.
5. Express Bridge Loan (EBL): The fastest-funding of all SBA products, these loans are intended to supply smaller amounts of money to presidentially-declared disaster areas to address immediate needs.

So what happens if you default an on SBA loan? In most cases, the lender would reach out to you to discuss the situation and offer possible resolutions. Ideally, you would be able to reach a satisfactory agreement at this stage in the game. The further your default moves up the ladder, the harder it is to find solutions.

If you were still unable to make future payments on the loan, the lender would initiate the collections process. You can get details of how this works by reviewing the SBA loan agreement. The assets you used as collateral on the loan, such as property, equipment, or inventory, would be sold by the lender. They could also close your business or foreclose on your property.

Once the lender had expended all their options for recovering the money provided in the loan, they would submit a claim to the SBA. As you recall, the SBA guarantees a substantial portion of each loan they facilitate. In this case, they would pay that amount to the lender on your behalf.

The SBA would then come to you seeking compensation for the guarantee they’d just paid to the lender. You’d have the option of either paying the remaining balance in full or making an “offer in compromise.” 

If you pursue an offer in compromise, you would suggest a settlement amount less than what was actually due. The SBA would evaluate your finances and decide whether or not to accept the arrangement. To boost your odds of success, you would want to choose an amount that was doable for your business but also provided a significant portion of the balance to the SBA.

Assuming the SBA accepted your offer in compromise, you’d then have a new payment amount and schedule laid out. As long as you make the payments, everyone wins. If the SBA turned down your offer, you often have the chance to submit another offer. 

In unfortunate situations where negotiations with the SBA fail, your account would be sent to the Treasury Department. Be advised that the Treasury Department doesn’t mess around. They have full power to collect money from you by garnishing wages or taking your tax return.

Rather than let the situation escalate to this point, you could seek a settlement with the Treasury Department. They sometimes accept smaller payments, but it can be a lengthy process to get approval.

Defaulting on a loan definitely brings stress into your life. But sometimes the outside stresses that cause the default are simply too big to handle. Every small business owner deals with financial missteps, so never let a default define you. Get up, dust yourself off, find a way to solve the problem, and move on to greener pastures. Because there will always be better times ahead.