Around 20,000 to 25,000 businesses file for bankruptcy annually. But bankruptcy can take a toll on your business and your finances.
If you have an SBA loan that you can't pay, you can apply for an Offer in Compromise to get the financial relief you need.
Keep reading to learn what to consider before you file with the SBA.
1. Bankruptcy Proceedings
When applying for an Offer in Compromise, you can't be in the process of filing for bankruptcy. If you have problems paying for more than your SBA loan payments, bankruptcy can be a good option.
However, an Offer in Compromise is an alternative to filing for bankruptcy. Applying for both isn't necessary, so you should determine which is better for you.
With an Offer of Compromise, you can settle your debt out of court, which can make everything less stressful.
Now, some businesses will benefit from declaring bankruptcy. But it can do a lot of damage to your credit and your ability to get future loans.
Bankruptcy can also have up to $150,000 worth of hidden costs. Unless you need to declare bankruptcy, you should explore alternatives first.
If you want to maintain your financial status, you should consider an Offer in Compromise. Then, you can pay off your debts without sacrificing your entire financial situation.
2. Legal Defense Cases
Even if you don't need to file for bankruptcy, you should consider if you're a defendant in a legal case. If so, that can help you prove your inability to pay your SBA loan.
While keeping cases out of court can lower the cost, you don't always have that control. If the opposing party doesn't want to negotiate a case, you'll have to pay for legal counsel for the trial.
You may face a trial for problems with your product. And if you're a sole proprietor, personal trials can affect your business.
On the one hand, having a trial means you have to spend more money to prove your case. However, you can use that as leverage when applying for an Offer in Compromise.
Whether your case has a factual dispute or another issue, your legal fees may burden your business finances. As long as you can show your small business finances, any major expense can help you get an Offer in Compromise.
You'll still need to pay back some money on your loan. But depending on how much of a burden you have, you can reduce your loan bill.
3. Loan Status
You also need to put your SBA loan in liquidation status. That can help you qualify for an Offer in Compromise
The SBA has a set of procedures they follow for liquidation loans. You may need to prove that your business has a lot of expenses that you can't afford to pay.
Then, you can get your SBA loan to have liquidation status. You can consult the SBA to determine your loan status and if you can switch it to be in liquidation.
After you obtain that status, you can move forward with your application for an Offer in Compromise.
If you can't pay for your loan, you can use that to liquidate it. That can then help you move further through the process.
You can also work with a lawyer to help make your case. If you can prove you have too much financial liability, you may be able to get the offer without having a loan in liquidation.
4. Risk of Financial Hardship
You don't have to currently have financial issues to qualify for an Offer in Compromise. But you should be able to prove some financial hardship.
If you can show that paying the loan in full will be difficult, you can get an adjustment on your loan. One way to show this is if you're disabled or ill.
You may be able to use other methods to prove the debt would cause hardship. It can depend on your situation, so you should consult with an attorney for specifics.
To determine if paying your small business loan will give you financial problems, you should calculate a few things.
Figure out the cost of your loan, including the principal amount and any interest you owe. You should also think about any major expenses you have to pay.
You'll be able to use that information to prove your case to SBA. It can be hard to determine risk of financial hardship, and sometimes that may be subjective.
But the more information you can provide, the easier it will be for you and your lawyer to prove your case.
5. Payoff Time Frame
Another thing to consider when applying for an Offer in Compromise is how long it will take to pay off your debt. If you can't pay your loan in a reasonable amount of time you may qualify for refinancing.
This applies to both paying your loan regularly or if SBA goes through loan collections. When it takes over a certain amount of time to pay back your loan, it may be worth it to SBA to compromise.
Unfortunately, it can be hard to determine what is reasonable and what's not. If you aren't profiting much, that may be one tool you can use.
Your basic small business expenses might also help you prove you can't pay the debt soon.
You can contact the SBA to determine what they or the third-party lender considers reasonable. Then, you can get a sense of the numbers.
If you don't know what the other party considers to be reasonable, then you can have a harder time.
As the debtor, you may need to provide extensive financial records to prove this. However, it can still be worth it if you want to avoid the hassle of bankruptcy.
Get an Offer in Compromise
If you have significant small business debt, you don't have to pay it off. You can apply for an Offer in Compromise, especially if your loan is with the SBA.
The process can take time, and you should consider a few things before you start. But it can be a great alternative to other liquidation methods.
Are you ready to apply for an SBA Offer in Compromise? Contact us for a case evaluation.