The U.S. Small Business Association supports businesses with the SBA loan program.
The loans don't come from the SBA directly. They help lending partners reduce their risk, which makes it easier for small businesses to get loans.
It's a way to get the capital you need to start or grow your business.
But what happens if you can't make your SBA loan payment?
Loan default is a serious concern for business owners. Fluctuations in your sales can limit cash flow, making it difficult to keep up with your payments.
Keep reading to find out how to avoid defaulting on an SBA loan, whether you already have one or you're considering one.
What Happens When You Default
It's important to understand what happens when you stop paying your SBA loan payment.
If you miss payments, your loan will likely be considered delinquent. It can be considered delinquent even if you're only a day late.
At this point, your lender might add a late fee to your loan payment.
If you miss multiple payments, the loan might default. Your lender will start taking aggressive action to collect.
The SBA loan agreement allows your lender to force you into selling assets.
Your business assets are up first. Selling your business assets could be devastating, to the point of forcing you to close your business.
Even worse, your personal belongings, including your home, could be sold if you used them as collateral.
The SBA guarantees a portion of the loan, so the lender can file with the SBA to get that portion of the money.
The SBA will then try to collect that money from you. If you don't settle the debt, the Treasury Department takes over. They can garnish your wages and take your future tax returns.
Defaulting on the loan is something you want to avoid if possible.
To avoid defaulting, be realistic with your business funding needs. Look at your business finances to decide how much you can reasonably afford to pay back.
Having a clear picture of your business finances helps with this.
Prioritize Your SBA Loan Payment
The serious financial consequences of defaulting on an SBA loan are something you should keep in mind when prioritizing your debts. When things get tight, know what you need to pay first.
If you don't pay your SBA loan, you could lose all of your business assets. You won't have a business left.
Prioritizing that payment can help you keep your business afloat, even during difficult financial times.
Reduce Business Expenses
All businesses go through fluctuations in cash flow. If you're in a difficult financial season, look at your business expenses. Where can you cut back to have more money to go toward your debts?
If you're trying to expand your business quickly, you might stretch your budget too thin. Consider scaling back those expansion plans or now to get caught up on your payments.
Cutting extra services or finding ways to save money on supplies can also help. Look at your biggest expenses to see if you can make changes to reduce them.
If you're having trouble paying your loan, bringing more business into your company is a priority. Increasing sales is the ideal way to do that, but you can't always just increase your income easily.
Liquidating some of your assets, such as equipment, can give extra money. It's not ideal to sell your assets, but you might be forced to do so anyway if you default on your loan.
Doing it on your own gives you more control. If you're forced to sell off your assets, you won't have any control over the matter.
When you get caught up financially, you can focus on growing your business again.
Talk to Your Lender
Are you feeling the pinch when it comes to paying back your loan?
Don't wait for your lender to call you. Take the first step by calling your lender to let them know you're in a difficult financial situation.
When you call early, your lender will be more willing to come up with an option that works for both of you. This is especially true if you're experiencing a temporary financial issue with your business.
If you're already delinquent or in default, don't avoid the calls from your lender or the SBA. Avoiding the situation won't make them stop pursuing collections.
Confront the situation head-on. Even if you're already delinquent or nearing default, your lender might work with you.
Ask for a Modified Repayment Plan
Your lender might offer you a modified repayment plan to help you get caught up or avoid default. The terms might lean more toward the lender's favor, but it could be a way to avoid the financial ruin of defaulting.
Lenders are often willing to work with borrowers to save money. It's expensive to try to collect on defaulted loans. If they can get some money, even if it's less than your normal payment, they might choose that option.
The SBA will have to approve those modifications since they have a vested interest in the loan.
Make sure you can meet your obligations for the modified repayment plan. If not, you could still face default and further collections.
Offer in Compromise
If you default on your loan and the SBA tries to collect, you have the option of an Offer in Compromise. It's a settlement option that can keep you out of court.
To complete the form, you'll have to give the SBA all of the details on your financial situation. That includes your tax info, income, expenses, asset transfers to other people, and all of your asset details, both personal and business.
Get Help From an Attorney
If you're facing a default situation, having an experienced SBA attorney can help you get the best possible outcome. An attorney can walk you through the process and help you come up with an Offer in Compromise that gets accepted.
Grow Your Business With an SBA Loan
When your SBA loan payment becomes too much, you risk defaulting on the loan, which can have devastating financial effects on your business. Borrowing responsibly and being proactive when hard times hit can help you minimize the financial impact.
Are you facing default on your SBA loan? Learn more about our SBA services to see how we can help you settle your debt.