It's a sad reality that half of all small businesses fail in the first five years of existence. While it might be the big dream of many to own their own business, the truth is that it's a tough road to create a successful and thriving business.
You may have thought you had a good plan and even worked out some financing through an SBA loan. Now, as your business struggles, that loan debt might be getting to be too much for you and your business.
When you sought a Small Business Administration (SBA) loan for your business, you had a plan to manage the debt. But even the best debt plans can go awry.
Now, you might be in the position of trying to figure out how to settle this loan debt as your business is in trouble or already shuttered. Read on to learn more about your options.
Understanding How SBA Loans Work
Before discussing the repayment of SBA loans, let's take a look at how an SBA loan works.
When you seek an SBA loan, you don't go directly to the Small Business Administration. Instead when you apply for an SBA loan, you go directly to your own lender and seek a loan backed by the SBA.
Your lender then takes your application to the SBA to see if they will provide the backing. It requires more documentation and paperwork from you, the applicant, and more work for the lender too. Yet, it reduces their risk because the loan is being backed by federal funds through the SBA.
The money you get for the loan comes from the lender but is just insured in case of default by the SBA. Understanding this matters as you try to figure out what to do with your loan that needs to be settled.
Once you're granted an SBA loan through your lender, your payments go to the lender. You're in essence paying them back, not the SBA.
So, if you fall behind on payments, it's the lender who will seek repayment. They will go through the debt collection process. If you default on your loan, the lender will go back to the SBA and request the guarantee be paid.
It's possible the lender might forgive part of the loan, you'll want to make every effort to work with them before having to deal with the SBA. The lender knows the SBA only guarantees a portion on the loan anyway, so they may be willing to forgive part of it.
The SBA has something called an offer in compromise that might allow you to get forgiveness on part of your loan. However, an offer in compromise is only an option after the loan is in default.
You might be very worried about paying this money back and hoping that some of it will be forgiven by the SBA. Having said that, you need to make every effort to avoid your loan going into default.
The SBA is not generous when it comes to arrangements in an OIC. They will make every effort to get their money and use whatever assets might be available to do it.
So, before you latch onto the idea of an offer in compromise, let's discuss how you should approach the money you owe.
If you're behind on payments, it's important to take a breath and remember how an SBA loan works. Remember, the money for your loan came from your lender.
If you're having trouble making payments, you want to work with your lender first. Go to them and ask for help. Don't hide from the problem or pretend the problem doesn't exist. It will only make it worse to ignore it.
Go directly to your lender and ask for a payment arrangement. They might be willing to do lower payments for a period of time, for example. They might be able to adjust your interest rate or waive late fees if you need to pay a little late.
But you need to really work to communicate with the lender. You want to make every effort to avoid defaulting on your loan.
A Loan in Default
What happens if your loan goes into default or is about to default? In most scenarios, (loan terms vary from lender to lender) a loan is considered in default when it becomes 120 days behind in payments.
So, what are the consequences of a loan in default? Once the loan goes into default the balance on the loan is due in full. The lender can then go back to the SBA asking for repayment.
If the SBA pays off your loan to the lender, be prepared for them to come to you for repayment and with every intention of getting the money.
What to Do If You're In Trouble With Your Loan
Even the most successful small businesses have faced financial struggles. There is a natural ebb and flow to running a business that you need to be prepared for.
If you're behind or facing a cash problem, you need to address it right away. One option might be to seek an SBA loan deferment. This would help your business get back upright and get caught up. As your lender and the SBA consider your requests for help, there are some things they will want to see.
Do You Have Cash Flow?
While your intentions might be completely genuine, it's not likely to get help from a lender or from the SBA if you can't legitimately show you can hold up your end of the agreement.
It's one thing to agree to a repayment plan, you'll need to show you have the money coming in to actually make it work.
Many small businesses struggle and eventually fail because they don't have adequate cash flow. Your cash flow is how much money you have coming in to help you pay your debts.
You'll want to make sure your books are up to date and you can show you have money coming in from accounts receivable. If you have customers who are behind on paying you, you'll want to make every effort to get paid so you can show you have the money you need coming in to actually live up to the deferment or repayment plan.
Show Some Responsibility
The truth is that nobody likes to be behind on their bills and you might want to hide from the problems. But lenders are going to be more willing to help you out when you make every effort to be proactive and responsible.
Be prepared to show the lender your track record and your books. Show your profit margins and what's impacting them. The lender will want to believe if they help you that you can live up to your part of the deal. You can do that by making sure your books are ready for the lender.
It won't make sense for them to want to help you or believe you can get out of the trouble if you're unable to fix the situation.
Communication is the key to getting the help you need. So many borrowers avoid the calls and are afraid to talk to the lender. Your SBA deferment may depend on you showing you will do exactly what the lender is asking of you.
If they ask you for paperwork or documentation, it's necessary that you provide it in the timeframe they request. Anytime you do something and it's late it sends a message to the lender you aren't sincere in your efforts to fix the problem.
When you sought an SBA loan you were likely asked to offer your own down payment or collateral in exchange for the loan. You will want to carefully consider the role that collateral will play in getting behind.
If the collateral sold off is worth more than what you owe, the bank can sell it to get their money. If you go into default and have to work with the SBA to try to come to a resolution on your debt, the SBA will certainly want to know the value of all assets.
You want to be forthright about the equipment your business might need to continue working. It won't make sense for the bank to seize a piece of equipment you need to operate your business. But don't be surprised when you're asked for an accounting of assets, including equipment.
Offers in Compromise
If your loan goes into default and you are then dealing with the SBA, one possible option is an offer in compromise agreement. There is no guarantee that the SBA will approve an offer in compromise and you should know upfront, they do require your business to be closed.
They expect to know about all of your assets and it's likely they will require them to be sold to get approval. You want to carefully consider this option especially if you have used your house as collateral. The SBA will want any equity from the house as part of the repayment plan.
Finding a Way Out of SBA Loan Debt for You and Your Business
When your business took on this loan debt, certainly you couldn't imagine being behind on your loan or trying to figure out a forgiveness plan.
Working this out with your lender and the SBA may require some professional assistance. These arrangements and even negotiations can be complex and it makes sense to have someone who's looking out for your interests.
Contact us today to discuss your debt and let's see if we can help you come up with a forgiveness agreement.