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If you can no longer repay your SBA loan, you can end up defaulting on your debt. Once that happens, you can face a long series of consequences.
First, the lender will attempt to collect the debt. If it’s unsuccessful, the lender may seize your collateral to recover its losses. The Small Business Administration may step in and repay the lender—the SBA guarantees a portion of the loan—and then seek repayment from you.
Yet, that can be just the beginning. If you’re having trouble repaying your loan, communicate this with your lender as soon as possible to avoid severe repercussions.
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What Does It Mean To Default on an SBA Loan?
Defaulting on an SBA loan means a business owner fails to fulfill the agreed upon repayment terms of an SBA business loan agreement. Typically, a loan enters default after a business owner misses payments for three to four months.
At this point, the lender will consider the business unable to repay the loan and start the process of trying to collect on the loan. Since many SBA loans are backed by collateral, the consequences can be wide ranging and severe. In many cases, the default process is outlined in the loan agreement.
Before a loan enters default, most lenders will consider it delinquent. If this happens to an SBA loan you’ve having trouble repaying, communicate with your lender to see what options you have before it enters default.
What Happens If You Default on an SBA Loan?
When you default on an SBA loan, a series of events are triggered. Before you enter default—or better yet, before you accept a loan—consider the possible consequences as they can impact your business and personal finances.
Although the exact steps can vary by lender and loan agreement, the consequences of defaulting on an SBA loan can include:
- Lender seizes collateral. When an SBA loan enters default, the lender can take the pledged collateral, such as real estate, vehicles, equipment or other business assets. This serves as a means for the lender to recoup the outstanding loan balance.
- Lender enforces personal guarantee. Most SBA loans require a personal guarantee from owners who have a stake of 20% or more in their business. If the borrower defaults on the loan, the lender can enforce this guarantee and seize the owner’s personal assets to repay the debt.
- Lender files for SBA guarantee. If the lender can’t collect on the defaulted loan, it can file a claim with the SBA for repayment of the guaranteed portion.
- SBA seeks repayment. Once the lender receives payment from the SBA, the SBA then seeks to collect on those guaranteed funds from the borrower. This process begins with the SBA sending a letter to the borrower that requires a response within 60 days or the account gets transferred to the U.S. Treasury Department. At this step, the borrower can repay the loan or submit an offer in compromise (OIC).
- Borrower submits an offer in compromise. An OIC is a settlement agreement between the borrower and the SBA, where the borrower agrees to pay off a portion of their debt in exchange for forgiveness of the remaining balance. This is usually considered a last resort option and requires approval from the lender and the SBA. A borrower can only submit an OIC form after all collateral has been liquidated.
- SBA transfers account to the Treasury Department. If settlement isn’t possible, the SBA may transfer the borrower’s account to the U.S. Treasury Department for further collection actions. This could result in wage garnishment, tax refund offset or other means of collecting payment from the borrower.
What Happens If You Default on an SBA Disaster Loan?
If you default on an SBA disaster loan, the lender can seize collateral, enforce personal guarantees and take other steps to recoup its losses. These efforts could result in loss of assets, legal action and a significant hit to your credit score.
Make sure you understand these severe consequences before you stop making payments. If you’re struggling to repay an SBA disaster loan, contact your lender to discuss repayment options.
How To Avoid SBA Loan Default
Borrowing an SBA loan can provide significant financial support for your business. Yet, defaulting can cause widespread harm. If you’re having trouble repaying your loan, there are steps you can take.
Understand Your Business Finances
Thorough financial planning is crucial to any successful business venture. This involves constructing a realistic budget, keeping track of income and expenditure and setting aside sufficient funds for loan repayments. Financial planning can help cushion your business against unexpected financial blows and ensure you stay ahead of your loan repayments.
Renegotiate Loan Terms
If you need help with your current loan repayment plan, approach your lender to renegotiate the terms. Lenders often prefer restructuring loan terms to accommodate a borrower’s changed circumstances rather than dealing with a default.
Renegotiating can involve extending the loan term, reducing the size of monthly payments or changing the interest rate. Communication with your lender is key: If you’re upfront about your financial situation, your lender is more likely to work with you to find a solution.
Refinance the Loan
Refinancing your SBA loan with a different lender can help you secure repayment terms that better fit into your financial situation. Doing so can result in lower monthly repayments, a reduced interest rate or an extended loan term.
That said, approach refinancing with caution. Thoroughly research potential lenders and their terms to ensure you’re not trading one financial problem for another. A business loan calculator can help you estimate the total cost of the new loan to determine whether refinancing truly offers an advantage.
Seek Professional Help
If managing your business finances becomes overwhelming, seeking help from a certified public accountant or attorney can be helpful. These professionals can offer expert advice and practical strategies to help you manage your debt and avoid defaulting on your loan.
Hiring a professional can be an added expense, but the long-term benefits can far outweigh the cost. They can help you make informed financial decisions, devise effective debt management strategies and potentially save your business from financial ruin.
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