No 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.
What Is the SBA Offer In Compromise Program?
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.
Offer In Compromise, Things to Know
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.
Sadly, Your Business Must Close
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.
Asset Liquidation Is Necessary
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:
- Find a buyer
- Have the bank find a buyer
- Bank can put the business into a general auction
- Supervised liquidation of individual assets
Working with your bank is important at every step of this process and you should make every attempt to follow their lead.
Home Equity Will Be Considered
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.
Don't Expect or Hope for Total Loan Forgiveness
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.
Work With Your Lender
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.
Approach the OIC Application In Good Faith
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:
- Form 4506T
- SBA Consent to Verify form
- 2 years of personal tax returns
- Proof of income for at least two years
- SBA form 770
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.
Be Prepared to Get 1099 Form
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.
Acceptor Decline, Waiting It Out
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.
Small Business Finances and OIC
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.