SBA Loan Default: What Happens if You Don't Pay?

Did you default on a loan given to you by the Small Business Administration? We're telling you what happens if you don't pay and what you can do with an SBA loan default.

For thousands of small businesses around the country, the Small Business Administration (SBA) is a lifeline, helping them secure loans when no one else is lending.

Small business helps create jobs, increase tax revenues, and strengthen the nation's gross domestic product (GDP). They help the country remain independent and strong in the international marketplace.

The SBA guarantees loans from banks like Wells Fargo and Chase to help more small businesses start and stay in business.

But when a small business fails, an SBA loan default may occur. If you have an SBA loan, it's important to understand what happens when you default on an SBA loan.

Let's look at what's involved.

The Players

Investing in a small business is very risky. Starting a business requires a lot of starting capital and it can take years for that business to become profitable.

An entrepreneur may have the know-how, drive and inspiration to start this business. But he/she may lack sufficient capital to get started or to even qualify for a loan.

While the SBA does require that you have a certain amount of "skin in the game", you can qualify for SBA loans with less personal financial investment. This allows amazing businesses who would otherwise never get a shot to prove that they've got what it takes to succeed.

The SBA is a federal agency. When you have an SBA loan the federal government is a player in the loan process.

But when you take out an SBA loan, you're not borrowing from the SBA directly. The SBA is set up to guarantee a portion of the loans from lenders.

So in addition to the federal government, you'll also have a lender that's investing in you and expecting a return on that investment.

Pre-Default Negotiations

Banks lose money when they have to pursue someone in SBA loan default, so sometimes they may choose to work with you to reduce the damaging effects of a default on themselves.

While you can expect any new terms to be largely in the bank's favor, the arrangement will be mutually beneficial.

In these cases, it's important to recognize that should you reach an agreement with the bank, this will need to be approved by the SBA as well.

This can create that proverbial "red tape" that many encounter when working with a federal agency.

It's highly preferable to work with your lender before the SBA loan default.

The Collections Process - The Lender

Once the SBA loan default has occurred the collections process will begin.

The bank will send you a letter and call you. It's important to realize that FTC guidelines that specify how, when, where and how often they can contact you don't apply to business loans. Any related laws that may apply will vary by state.

During the initial collections phase, if you don't come to some kind of catch-up agreement, the bank will move forward in accordance with the SBA loan agreement.

Per the agreement, they may be able to force you to sell assets. This will most often begin with business assets. But could include your personal home or other real estate if used as collateral.

Your control in the situation may be limited. The lender may be able to force your business to shut down and auction off these assets.

The lender will exhaust all options to collect the debt before filing with the SBA for the portion of the loan that was guaranteed minus the amount that they were able to collect.

At this point, you may be left with no assets either personal or business. But the process is not complete.

The Collections Process - The Federal Government

Once the lender is out of the picture, the SBA is still out the money that they paid to the bank as part of the SBA loan agreement.

As you'd be well aware if you've ever dealt with the IRS, the federal government has much greater recourse to secure repayment of the loan.

The SBA will first send you a 60-day demand letter. At this point, you have been referred to the Treasury Department, who will pick up the collections if you do not resolve before the due date.

Within this 60-day period, you will be required to either settle the debt or provide an "offer in compromise".

Your finances will be thoroughly scrutinized to determine how much you have the ability to pay.

They prefer, of course, for you to pay a lump sum. But payment plans can be negotiated.

The Offer in Compromise

In the offer in compromise you will give a detailed accounting of your finances including:

• Tax returns over the past few years
• Assets (business & personal)
• Transfers or acquisitions of assets including the relationship of the person who acquired the asset (to ensure that you didn't dump or gift assets to seem asset poor)
• Statement of income
• Expenses

The offer in compromise should be compelling and strongly numbers based. Those numbers should be clearly supported by the attachments. These numbers should demonstrate that the SBA won't be able to recover the amount borrowed in a reasonable amount of time.

Additionally, an offer in compromise is only accepted if you have ceased operations and your business has been completely liquidated.

Rejection of The Offer in Compromise

The offer in compromise is often a one shot deal. If they reject it, they may allow you to refile if it's in their best interest. Otherwise, your debt now "belongs to" the US Treasury Department

This department has the ability to garnish wages, keep any future owed tax refund or file suit and seek a civil court judgement against you.

Once you've reached this stage, settling the SBA loan default is still possible. But it becomes much more difficult.

SBA Loan Default Assistance

Going through an SBA loan default is serious business. It's scary. And you could end up paying more than you have to.

We're here to help you navigate the SBA loan default process. If you're in default, get pre-qualified by filling out our quick online form today.