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SBA Loan Default: 6 Things You Should Know

Are you concerned with what to do in the event of an SBA loan default? Then read about some things you'll need to consider when defaulting on an SBA loan.

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SBA Loan Default: 6 Things You Should Know

As an entrepreneur, you need funding to get your small business up and running. If you tried going the traditional route of securing the funds you need to start your business, and you received a denial, you aren't alone.

At least 36% of companies were denied traditional funding due to their credit scores or low annual business income. Most businesses turn to the SBA to get the financing they need, but they face an SBA loan default if they can't make their payments on time.

If you are currently in this situation and need help with what to expect and guidance on what to do next, continue reading below! This brief SBA loan default guide will cover all you need to know about the default process and who you can contact for additional information.  

1. Delinquent to SBA Loan Default Process

Your SBA loan usually goes into default when you repeatedly fail to meet the legal conditions of the loan agreement. It will first be considered delinquent before your loan even gets to this point.

Loans typically become delinquent as soon as you miss a payment or pass your ten-day grace period. Each lender is different, but most will charge a fee even after just one day of missing your payment.

2. Your SBA Loan Agreement Information

Depending on your loan agreement, your loan will fall to a default status after a certain amount of time passes. If you do nothing about your missed payments, your loan will fall into default status. This process usually happens between three to four months.

3. Forced Default Situation

If you have no alternative options or you have no way to pay your loan, your lender will force your loan into default status. Once they do, they will start their standard loan collection process according to how it is outlined in your agreement.

Your lender should first reach out to you via email, mail, and phone. Federal Trade Commission guidelines restrict when, how, and how often your lender can reach out to you about your missed payments. Restrictions on their communication depends on the state that your business operates in.

Per your SBA loan agreement, the lender has the right to seize the collateral you put up for the loan. If the business collateral is not enough to pay the loan, the lender has the right to invoke your personal guarantee, if applicable.

This means they can take possession of your personal assets to recoup their loss. The lender may force you to sell your assets, or they can get a court order demanding money from your business accounts.

4. SBA Loan Guaranteed Portions

If your business assets and personal guarantee are not enough to cover your debt, the lender will file with the SBA for their guaranteed portion of the loan. Even if the SBA pays the lender back for the remainder of the loan, you aren't off the hook just yet.

The SBA will then reach out to you for repayment of the money they paid your lender as outlined in your agreement. The SBA will send you a 60-day demand letter that states that unless you respond to the SBA within 60 days, they will refer your case to the Treasury Department.

5. Submit an OIC

If you cannot pay what the SBA is asking you to pay, you will need to create an "offer in compromise." This offer in compromise is a payment plan or a lump sum settlement offer you are willing to pay to settle your debt.

When creating your offer in compromise, there are some documents you must present:

  • Income statements
  • Business assets
  • Personal assets
  • Expense reports

These documents should prove to the SBA that you don't have the means to pay back the money you owe within a reasonable time. If your argument is convincing enough, the SBA may accept your offer, even if the offer amount is less than what you owe.

If you need help creating an offer in compromise letter, you can reach out to a reputable SBA loan attorney. They can help prepare your documents and argue your case on your behalf.

What Happens if I Don’t Respond to the SBA?

If you don't respond to the SBA's 60-day demand letter or if the SBA doesn't accept your compromise letter, they will send your case to the Treasure Department. This department can withhold future tax refunds, garnish your wages, or file suit against you.

You can still work with the Treasure Department to work out a payment plan, but the process is much more complex. It is much easier to deal with the SBA instead.

6. Seek Attorney Help With Your Default on an SBA Loan

As mentioned earlier, if you need help with creating an offer in compromise letter, you can reach out to a reputable attorney. Not only can they help with the letter, but they can help you with the entire situation.

You definitely don't want to go head to head with the SBA on your own if you aren't sure of their processes or your rights. You are more likely to succeed with your SBA loan default case with legal representation because they understand the default loan process. They also understand important SBA loan default statutes that pertain to your case.

Get Past Your Default on SBA Loan

It is very important to remember that even if trouble arises and your SBA loan defaults, there is still life after the default. There are reputable SBA attorneys who can help you navigate the default process and help you settle the debt.

Once you move past this moment, you can move forward and focus on restoring and improving your financial health. Contact us now if you are currently dealing with an SBA loan default and need someone to guide you through the process. You can also check out our blog for more tips about SBA loans.

Why Hire Us to Help You with Your Treasury or SBA Debt Problems?

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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

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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

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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 SBA 7(a) loan for $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.



Client personally guaranteed SBA 7(a) loan balance of over $150,000.  Business failed and eventually shut down.  SBA then pursued client for the balance.  We intervened and was able to present an SBA OIC that was accepted for $30,000.



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. 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 we also save him approximately $227,945 over the term of the workout.

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