How to Refinance an SBA Loan Successfully
If your SBA loan is now making it hard to operate your business, you may want to consider refinancing. Learn more about how to refinance an SBA loan.
If you have had trouble with small business finances, then you may have heard about offer in compromise, or OIC. Here is everything you need to know.
Book a Consultation CallNo matter how great your idea or even how hard you work, the statistics can be startling for small business owners. In the first year, some 20% of the businesses fail. That percentage climbs to 30% in the second year and a daunting 50% by 5years. It can be tough to survive as a small business.
To get started, many small businesses rely on borrowing money through the Small Business Administration. No matter the level of sweat equity you're willing to put into your business, often you need funding to start and funding to grow.
Unfortunately, for many small businesses keeping track of their business finances is a challenge and often where they fall short.
If you're a small business owner who has an SBA loan in default, you may be hearing the phrase offer in compromise or OIC. If you're starting to realize there isn't away out to fix your default, it's time you learned about offers in compromise and what it can mean for the money you owe on SBA loans.
Read on to learn more about what you need to know about SBA's offer in compromise.
The SBA certainly knows the statistics on small business success. They understand that while some succeed, many small businesses face hardship, default on loans, and eventually fail. The SBA has created a program to help small business owners who have defaulted. This program is intended for those who have made personal guarantees on their loans.
When you sought a loan that was backed by the SBA, they gave your business money. Yet, you signed off as a personal guarantor of the loan. Because you signed as a personal guarantor of the loan, if your business fails, you become responsible for the balance of the loan.
The SBA offer in compromises program allows you to negotiate with your lender and set up a settlement agreement. Don't be misled, this is not loan forgiveness. You'll still be responsible for at least part of what you owe after liquidating assets.
If you find yourself ready to close your business, it makes sense to seek legal advice from someone who regularly works with SBA offer in compromise settlements.
If your business is in default with an SBA loan, you may seek an OIC settlement. These are not guaranteed by any stretch. The SBA and lenders will expect you to jump through some hoops to get your OIC application approved. Here are some things to know about offer in compromise agreements.
You might hope to seek an offer in compromise from the SBA and keep your business open. While there are very few situations where the SBA has approved this scenario, it's an almost never scenario. On top of that, you risk a decline if you seek to stay open and arrange an OIC.
The truth is the SBA will not negotiate a settlement or consider loan forgiveness if your business is still open. Before you even begin the process of applying for an OIC as the personal guarantor, you need to reconcile with the fact that your business must close.
It will be necessary to liquidate assets. For most small businesses, the money from the liquidation will not be enough to cover the balance of the loan. It can be tempting when you recognize the end is in sight to start selling things. This is a mistake.
You want to have a legal plan for liquidation. You also want to be accountable for the money you get from the liquidation. When you have a pile of debts, it can be tempting to start selling things and even pay debts like credit cards. This can actually disqualify you from and OIC which is why you want to approach liquidation very carefully.
There are a few options to liquidate a business. You can:
Working with your bank is important at every step of this process and you should make every attempt to follow their lead.
Some states prohibit borrowers from using their homes as collateral for an SBA loan. Unfortunately, this is not the case in all states. If you used your home as collateral, the equity available in your home will be considered.
The SBA will not be interested in a settlement with you if you have enough equity to cover what you owe. Unlike when you apply for a loan, the equity isn't calculated using market value minus the loan amount.
The SBA may consider the market value and discount that rate like it's a foreclosure with a variety of costs connected to it.
You might be feeling desperate and overwhelmed and your small business finances might be in disarray. Nevertheless, if you got an SBA 7(a) loan, you shouldn't hope for or expect total loan forgiveness.
It's better you're prepared and know this going into your application for an OIC. If you have a Paycheck Protection Program loan, you may seek 100% loan forgiveness. For the SBA 7(a) loans, total forgiveness will not happen.
There's no doubt you feel awful about your business situation. You may even feel negative feelings towards your lender. Your business failing can't fall on them. And while your instinct might be to avoid them because, well, you don't know what else to do, it's the wrong choice.
In the end, it really only makes matters worse to avoid communicating with your bank. The more you can make every effort to do what they are asking and communicate with them, the more likely you can strike a better deal when it comes time to negotiate.
If you have avoided them, been difficult and uncooperative, they may see no reason to believe you will act in good faith with a settlement agreement.
You might feel defeated and frustrated, now is not the time to act or work half-heartedly. Remember, your business is not the one applying for the OIC. You, as the personal guarantor, are the one applying to the SBA for the OIC.
Your application should be done with careful accuracy and completeness. The SBA has no reason to approve your OIC if you aren't honest or complete on your application.
They will want a whole host of forms and information from you so they can calculate and consider your application. Now, is absolutely not the time to lie or leave things off like college savings or retirement accounts. First, the SBA will do a thorough investigation of your finances. Second, you really hurt your credibility that you want to make an agreement by going into it being dishonest.
They will want:
The more complete you are in what you provide, the better chance you can avoid being declined.
It may be your instinct to send in a lowball offer to see if the SBA will accept it. It really isn't in your best interest to do that. They want to see that you're approaching the OIC application in good faith and want to reach a reasonable settlement.
If you are an individual borrower(i.e., sole proprietor), when you seek loan forgiveness, the IRS will view this as income. You might be able to negotiate a settlement agreement that is okay with you and helps you out from under the full amount of the debt.
Yet, you should be prepared that you'll be sent a 1099 form by the bank for the settlement amount. This is where working with an attorney who understands this process is so important. They can help to show you the implications of this in the longer term.
However, if you are only a personal guarantor, and not the direct borrower, the 1099 will not apply.
SBA Form 1150 doesn't beat around the bush. Your application will look more favorable to the SBA if you can offer a lump-sum settlement versus a payment plan. This is where you should begin to anticipate this process and start to save and scrounge to put together a lump sum settlement amount.
Once you make the decision to close your business and seek an OIC, you might be anxious to just have the whole thing over with, even quickly. Be prepared that this process is not a quick one. It can take many months to put together your application and even more months of waiting for a response from the SBA.
If you're lucky enough to get approved, it's critical that you honor the agreement in good faith.
Don't despair if your application is not approved, don't give up hope. The no doesn't mean no forever. You can reapply. But you need to really reevaluate your offer. Talk with your lender and see if they can provide some guidance to help get a more favorable outcome.
Handling business finances can be tough for small business owners. It can be even more upsetting and overwhelming when you know the business has failed and you need to find a way out of the obligations.
The SBA OIC program is one way to help small business owners who have made the hard decision to close their business.
It can be a difficult process to apply for an OIC and one you want to approach carefully and thoughtfully. It makes sense to seek the advice of someone who understands the process to increase your chances of getting your application approved.
We can help. Contact us today to set up an appointment to discuss your small business finances.
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 personally guaranteed SBA 504 loan balance of $750,000. Clients also pledged the business’s equipment/inventory and their home as additional collateral. Clients had agreed to a voluntary sale of their home to pay down the balance. We intervened and rejected the proposed home sale. Instead, we negotiated an acceptable term repayment agreement and release of lien on the home.
Clients personally guaranteed SBA 7(a) loan balance of over $300,000. Clients also pledged their homes as additional collateral. SBA OIC accepted $87,000 with the full lien release against the home.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.
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