Anatomy of an SBA Loan Workout

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."

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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.