SBA Loan Default: How the Guarantee Works with 7a and Express Loans
We will analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise for your SBA loan default.
Are you interested in taking out an SBA loan? Here's everything you need to know about taking out and repaying SBA loans.
Book a Consultation CallThe United States has approximately 30.2 million small businesses. In fact, 99.9% of all businesses across the US are considered small businesses. 47.5% of Americans have employment by small businesses across the country.
Small businesses fuel the US economy and their success is key to continuing that trend. Yet, in order for small businesses to be successful, they need the funds to operate and grow their business.
How can a small business get the funds they need to stay in operation and grow too? The Small Business Administration offers a variety of SBA loans to meet the unique needs of small businesses.
Read on to learn more about the different types of SBA loans.
Let's start with some understanding of how an SBA loan works. If you want to get an SBA loan you don't go directly to the Small Business Administration.
Instead, you would go to a bank or credit union to apply for the loan. The lender would go to the SBA to see if they will back the loan. This means if you were to default on the loan, the SBA provides government backing to secure the loan for the lender. This makes lending easier for the lender since they know it's backed. You, however, have to sign a personal guarantee assuring the lender and the SBA you will personally pay back the loan if your business defaults.
Since 20% of small businesses fail in the first year of business and 30% after the second year, this backing is important. It also means these loans require a little more effort to get and some personal collateral from the borrower.
How long do you have to repay SBA loans? That depends on the type of loan. The SBA offers a variety of different types of loans depending on why you need the money or what you plan to use it for with your business. Let's take a closer look at the different types of loans.
The SBA 7(a) loan is the most widely and well known of the SBA loan options. With the SBA 7(a) loan the small business can borrow up to $5 million. The amount of time you have to repay the loan depends on what you designate to use it for.
If you get a real estate loan, you can have up to 25 years to repay. If you take equipment, working capital or inventory loan, you have up to 10 years to repay it.
These loans and their terms are based on the borrower's credit score and credit history. You are likely to need an average minimum credit score of 640 or above to qualify.
The SBA requires collateral to get approved too. Often they can require a down payment of about 10% of the loan amount borrowed for collateral.
One nice feature of the SBA 7(a) loan is that it can get used in a variety of ways. Uses might include:
The lender will be the one to set the interest rate you pay on the loan. This will be based on the prime rate and can be fixed or variable. The SBA, though, does put limits for the maximum rate that can get charged for their backed loans.
The SBA Express loan is under the umbrella of the 7(a) loan. One thing to know about most SBA loans is that they can be time-consuming to get. The SBA Express loan addresses that issue. It can get turned around in as little as 36 hours.
You should know that you still have to go through the traditional lender and they will do their underwriting. The SBA will also only guarantee 50% of the Express loan amount.
You can borrow up to $350,000 from this loan. If you do a loan you have a shorter amount of repayment time, up to 7 years for this credit line. It has the same uses as the traditional SBA 7(a) loan.
The Community Advantage loan is another that falls under the SBA 7(a) umbrella. This loan allows the small business to borrow from $50,000 to $250,000 and the SBA will guarantee up to 85% of the loan up to $250,000.
The interest rates tend to be slightly higher for this loan. Often it's the Prime rate plus around 6% which usually makes them about 7% to 10% interest rate loan. Small businesses have between 7 and 10 years for repayment on this type of loan.
The good news is that, like the Express loan, this one also has a faster turnaround from applying than the traditional SBA 7(a) loan.
The SBA CAPLine loans allow businesses to take out a line of credit. The intention is to help a small business with cash flow issues that might arise.
This might be a seasonal line of credit needed. They might also need to pay for materials before they can get payment from their customer. The SBA CAPLine provides the needed access to cash flow. A small business can borrow up to $5 million through this type of SBA loan.
There are four different options for CAPLine loans. Let's take a closer look at them.
This type of CAPLine loan helps small businesses to finance contracts, purchase orders, or sub-contracts. The loan can get used for:
This allows a business time to complete contracted work and get paid while still covering expenses.
This loan's intention is to help small businesses that are seasonal in nature. It allows the small business to cover expenses for accounts receivable, inventory, and sometimes labor costs during seasonal work.
You should note, though, that a small business is not allowed to use this type of loan during their off-season to stay in business.
This line of credit is intended specifically for contractors and builders. It allows them to access a line of credit for:
In some cases, a builder or contractor could also use this line of credit towards land purchase. There are restrictions on how much of the loan can get used for this purpose.
This line of credit is intended to act as working capital for operating costs. To get this line of credit, you must qualify through the same standards as the traditional SBA 7(a) loan and also show you have accounts receivable. This shows the SBA you can assume you have money coming into the business. You also need to show you have inventory in the business as assets.
The CDC/504 SBA loan is for the development of real estate for small businesses. CDC stands for Certified Development Company. To qualify for this type of loan you actually have to get approval from the bank and from a Certified Development Company.
Each of the two lenders will have different rates, terms, fees, and limits for the loan. Together they will make up the terms of the CDC/504 SBA loan.
This loan's intention is to help businesses buy existing industrial or commercial real estate. You can also use the loan to purchase a lot or make improvements to a piece of land. The SBA also allows this loan for the renovation of an existing building or to purchase long-lasting equipment for the business.
The SBA Microloan program allows small businesses to seek a smaller loan for operational uses. The loans are available for up to $50,000 for a maximum repayment schedule of up to 6 years. Typically, the interest rate for this type of loan ranges between 8% and 13% and requires a credit score of at least 640.
Microloans can get used for:
This type of loan is intended for non-profits and small business start-ups to get started.
This type of SBA loan is different from all of the others discussed because a small business would go directly to the SBA to get this type of loan. It is intended to help small businesses that get impacted by disasters like a tornado, hurricane, fire, or drought.
A small business could apply for multiple disaster loans at the same time, depending on the need. A small business could get up to #2 million and would have up to 30 years to pay it back.
There are several options to help small businesses survive the impact of the Covid-19 pandemic. For example, the Paycheck Protection Program is a forgivable loan that helps businesses pay their payroll while they are shut down.
The SBA is offering some other forms of relief too, including help for restaurants and debt forgiveness. Visit their website for more specific details.
SBA loans are offered for small businesses to help them with their financial needs so they can succeed and even grow. The SBA offers so many different types of SBA loans because there are so many different needs from small businesses.
If you want more information on SBA loans or more specifically repaying SBA loans, we can help. Contact us today to discuss your SBA loan needs.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA. Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice. Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt. After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.
The client personally guaranteed an SBA 504 loan balance of $375,000. Debt had been cross-referred to the Treasury at the time we got involved with the case. We successfully had debt recalled to the SBA where we then presented an SBA OIC that was accepted for $58,000.
Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. The client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but our SBA lawyers also saved him approximately $227,945 over the term of the workout.
.jpg)
