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.
Discover actionable tips for small businesses facing COVID-EIDL problems. Contact us today.
Book a Consultation CallThe Small Business Administration (SBA) continues to grapple with the complexities of managing its COVID-19 Economic Injury Disaster Loan (EIDL) Program, revealing significant charge-offs and oversight gaps. As small businesses face mounting financial challenges and a Trump 2.0 administration looming in January 2025, understanding the evolving SBA landscape is critical for borrowers, obligors and guarantors.
The SBA reported $18.6 billion in charge-offs from its COVID-EIDL program for fiscal year 2024, reflecting 6.5% of the active portfolio. While this is a reduction from the $52 billion in charge-offs during fiscal 2023, it remains significantly higher than he charge-off rates of other SBA programs, such as 7(a) loans (below 1%) and 504 loans (below 0.5%).
This high rate has raised questions about the sustainability of the COVID-EIDL program and the adequacy of SBA oversight. Audits by the Office of Inspector General (OIG) and KPMG revealed issues such as monitoring deficiencies, financial reporting weaknesses, and outdated servicing policies. These gaps have fueled concerns about long-term accountability and the SBA’s ability to support struggling borrowers effectively.
To assist borrowers, the SBA expanded its Hardship Accommodation Program (HAP), which offers temporary payment relief. Key features include:
· Eligibility: Enrollment for businesses with loans under $200,000.
· Reduced Payments: Initial rounds require only 10% of monthly payments,increasing to 50% and 75% in subsequent rounds for up to five cycles.
· Loan Reclassification: Loans enrolled in HAP are reclassified as performing, potentially lowering default statistics.
However, critics warn that HAP may delay inevitable defaults as interest accrues during reduced-payment periods, exacerbating long-term debt burdens for borrowers.
With a Trump 2.0 administration taking office in January 2025, SBA policies could undergo significant changes:
· Tighter Oversight: High COVID-EIDL charge-offs may prompt stricter compliance requirements and loan eligibility criteria to prevent further losses.
· Program Reforms: Existing SBA loan programs like 7(a) and 504 could see restructuring to enhance sustainability and reduce taxpayer risk.
· Aggressive Collections: A more assertive approach to recovering debts, particularly from delinquent borrowers and guarantors, might emerge as a fiscal priority.
Trump’s business-friendly stance could also lead to broader access to capital and settlement options, but likely with enhanced scrutiny of borrower accountability.
Borrowers with 7(a), 504, or traditional disaster loans may experience indirect effects of heightened COVID-EIDL scrutiny:
· Increased Compliance: More audits and stricter documentation requirements could complicate loan applications and renewals.
· Less Leniency: Unlike HAP’s flexibility, non-COVID SBA loans may face stricter repayment demands or accelerated collection efforts.
· Treasury Referrals: Borrowers and guarantors with delinquent loans could see their debts referred to the Treasury Department, triggering aggressive measures such as administrative offsets, garnishments, referral to Private Collection Agencies, lawsuits or foreclosure actions by the Department of Justice's Financial Litigation Unit.
Given the financial strain on small businesses, the SBA’s willingness to approve OICs, workouts,and settlements might expand, particularly under a Trump 2.0 administration prioritizing efficiency and deregulation. Borrowers and guarantors could benefit from:
· Settlements: Cash or Term OICs could become more accessible for guarantors proving financial hardship.
· Structured Workouts: Extensions on loan terms, reduced interest rates, or deferments may help borrowers avoid defaults while keeping businesses operational.
· Streamlined Approvals: Simplified processes for small-dollar settlements could expedite debt resolution for both borrowers and the SBA.
However, the SBA might also tighten eligibility criteria for settlements, requiring more thorough documentation and good-faith efforts to repay – especially if Trump nominee, Kelly Loeffler, takes the same approach that Besty Devos did with the Borrower Defense Rule and delinquent Department of Education student loans that were procured due to fraud by for-profit educational institutions.
Borrowers should consider taking the following actions to prepare for potential policy shifts and protect their financial stability:
1. Review Loan Agreements: Ensure compliance with terms to avoid default or collection escalation.
2. Engage with the SBA: Monitor communications and respond promptly to notices or program changes.
3. Consult Qualified Experts: Seek Certified Public Accountants or Lawyers authorized to practice before the SBA pursuant to the Federal Agency Practice Act to explore options like OICs, workouts, or bankruptcy, where applicable.
4. Stay Informed: Track developments in SBA policies and broader economic trends to anticipate changes.
The SBA’s challenges with the COVID-EIDL program offer lessons for future disaster relief efforts and highlight the importance of robust oversight. With potential shifts in SBA policies under a new Trump administration, small businesses should be vigilant, proactive, and informed. Whether through expanded settlement options or stricter debt recovery measures, borrowers should plan and prepare for a changing landscape in 2025 and the next 4 years.
This blog post is intended to provide general guidance and is not a substitute for professional legal advice.
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.
Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
Clients personally guaranteed an SBA 7(a) loan that was referred to the Department of Treasury for collection. Treasury claimed our clients owed over $220,000 once it added its statutory collection fees and interest. We were able to negotiate a significant reduction of the total claimed amount from $220,000 to $119,000, saving the clients over $100,000 by arguing for a waiver of the statutory 28%-30% administrative fees and costs.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
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