SBA Loans Explained - The 7(a) Loan
If you obtain an SBA loan - specifically a 7(a) loan, you can use the loan proceeds to help finance a great variety of business expenses.
SBA SOP 50 57 defines “workout” as "the debt collection and negotiation process as well as the final plan agreed upon by a creditor and debtor with regard to how the problems and issues surrounding the debtor's delinquent obligation to the creditor can be 'worked out' or resolved."
There are several alternative workout strategies but generally most, if not all, involve the restructuring or re-working of the material or important terms and conditions of the borrower’s delinquent loan.
Obviously, the objectives of a workout are to avoid bankruptcy, litigation, pre-judgment and provisional remedies (e.g. attachment liens) or foreclosure so as to help the borrower to cure defaults and improve repayment ability and to maximize the recovery potential on the loan for the creditor.
The SBA requires the lenders to make a good faith effort to negotiate a workout on an SBA loan which is seriously delinquent or has been designated in “liquidation” status. This means that failure by the lender to make an effort at a workout could result in a denial or repair, and not only could jeopardize presentment of the SBA guaranty, but also could be construed as violating applicable SBA SOPs and other federal regulations. Actually, lenders are required to document on paper the reasons as to why reasonable efforts at an SBA loan default workout were not achieved.
If an SBA borrower is having problems making payments on an SBA loan and is seeking relief from the lender through a workout, be advised upon request for a workout, that lenders are required to obtain updated financials, for e.g., a current financial statement (profit & loss statement, balance sheet and cash flow statement) that will have to be signed under penalty of perjury and must show borrower’s assets, liabilities, income and expenses. Additionally, the lender will also obtain the borrower’s last year-end financial statements, current consolidated financial statements of any affiliates and complete business and personal tax returns for the previous two years. If the borrower refuses to provide requested financial information, workout negotiations will not be pursued.
Once the financial information is obtained, the lender determines if an SBA workout is even feasible. In doing so, the lender reviews the financial information, and determines, among other factors, if the borrower has the technical and management skills to achieve a turnaround of the business, and whether the borrower is cooperating with the lender, acting in good faith and is financially and operationally viable.
There are many possible types of SBA workouts to consider. Lenders are required to document the justification for the final decision on which SBA workout option to pursue. As part of its written documentation, the lender will have an updated credit memo that includes a cash flow review and a complete liquidation evaluation based upon the most current financials and other information provided by the borrower.
If the workout is deemed feasible, negotiations will begin immediately and the workout plan will be implemented soon thereafter. Lenders are not allowed to let negotiations drag on. If an acceptable workout is not in place within sixty (60) days, the lender will proceed with its plan for enforced debt collection – which may include, exercising set-off provisions, collateral liquidation, litigation, foreclosure or even referral to the Department of Treasury.
Borrowers must be prepared to provide other "consideration" in order to make the workout agreement valid and binding on the parties. What this means is that the borrower must provide something of value to the lender in exchange for the benefit of the approved workout.
Generally, borrowers are required to correct initial loan document errors, reaffirm or provide additional personal guarantees, waive certain affirmative defenses, release lender liability claims, provide additional collateral when possible and agree to a summary method of liquidating the loan if the workout fails. In essence, if the SBA borrowers are not represented, most borrowers agree to almost every concession under the sun in order to obtain the workout from the lender – without ever understanding the ramifications of their decisions. This is where most borrowers lose their future ability to apply any leverage against the lender or SBA in the event that the future workout fails.
The applicable SBA SOP specifically identifies the most common types of SBA loan workouts which include: forbearance; reinstatement of maturity date; deferment; modification of repayment terms of note; assumption of loan; subordination of working capital loan; relief on secured senior loan; and voluntary sale of collateral.
Therefore, if a borrower is having financial problems and needs certain relief, the borrower should definitely consider requesting a workout with the lender as successful workouts help all parties involved in terms of avoiding default, collateral liquidation, protracted litigation, bankruptcy, and also help to promote the goals of the SBA.
If you find that your business is having problems paying necessary expenses and servicing SBA loan obligations, don’t just jump into a workout request. Contact a qualified SBA Workout Practitioner to assist in not only reviewing your loan documents and financial statements, but also to assist in advising you re the potential legal consequences of certain conditions precedent for the approval of an SBA workout as the “cost-benefit” analysis may ultimately work against a workout request.
If you have an SBA loan default or SBA problem, call us at 888-756-9969 for a complimentary Case Evaluation or simply complete our intake form for a confidential written report regarding your options.
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.
Small business sole proprietor obtained an SBA COVID-EIDL loan for $500,000. Client defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for aggressive collection. Treasury added $180,000 in collection fees totaling $680,000+. Client tried to negotiate with Treasury but was only offered a 3-year or 10-year repayment plan. Client hired the Firm to represent before the SBA, Treasury and a Private Collection Agency. After securing government records through discovery and reviewing them, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury citing a host of purported violations. The Firm was able to negotiate a reinstatement and recall of the loan back to the SBA, participation in the Hardship Accommodation Plan, termination of Treasury's enforced collection and removal of the statutory collection fees.
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 7(a) loan for $150,000. His business revenue decreased significantly causing default and an accelerated balance of $143,000. The client received the SBA's Official 60-day notice with the debt scheduled for referral to the Treasury’s Bureau of Fiscal Service for aggressive collection in less than 26 days. We were hired to represent him, respond to the SBA's Official 60-day notice, and prevent enforced collection by the Treasury and the Department of Justice. We successfully negotiated a structured workout with an extended maturity date that included a reduction of the 14% interest rate and removal of substantial collection fees (30% of the loan balance), effectively saving the client over $242,000.
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