Navigating SBA Loan Challenges: COVID-EIDL Charge-Offs, Trump 2.0 Policy Shifts, and the Future
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CDC loans bolster your business's usable capital. Keep reading to discover what SBA 504 loans are and what action you can take if you default.
Book a Consultation CallSmall business ownership is a dream of many people. What stops a lot of potential entrepreneurs from starting a business is the lack of access to funding. If you have not raised your own capital it can feel like an impossible feat to get a loan.
CDC Loan
The number of small businesses that open and close within one to five years speaks to the need for better funding options.
Having a business in a community development zone or being willing to open in one, could be the answer. The Small Business Administration offers government-backed Certified Development Company (CDC) Loans. You will need a decent credit score and the ability to provide a minimum of 10% for a down payment.
It may seem like a lot it but could propel your business in terms of growth.
Are you a small business owner looking for financing? Keep reading to learn more about SBA 504/CDC Loans and who qualifies?
The Small Business Administration (SBA) is a division of the federal government. On the surface, people believe its only purpose is to assist small business owners in securing government-backed funding. The agency is more multi-faceted than that.
Although they assist in securing loans geared towards starting, supporting, and expanding businesses, they offer other support. Business owners can also receive counseling services, learn how to secure government contracts, and receive relief after disasters.
Their loans typically require businesses to have been in operation for several years to demonstrate their creditworthiness. Owners also need to have a good credit score.
The SBA program is geared towards businesses that want to relocate or build in areas identified for community redevelopment. The loans are for the purchase of commercial real estate and equipment. It is a 90% funded loan that requires the remaining 10% come in a down-payment from the borrower.
A breakdown of the 90% in financing includes 50% from an approved financial institution and 40% from the CDC.
The business applying for the loan doesn't have to be located in the area but could be planning to relocate. The loan has job creation requirements that must be fulfilled by the borrower and/or the community development grant.
Let's take a closer look at the SBA 504 Loan.
SBA 504 loans are for businesses that have a net worth below $15 million. Your net profits for the past two years cannot be more than $5 million per year. As you can see, although this is a great opportunity, businesses applying for these loans must be well established and doing consistent business.
If your business is just starting you can still apply. The efforts to get approved will be a huge hurdle to get over. Having exceptional credit, a strong business plan, and financial records to support your ability to repay the loan, increase your chances of being approved.
Regardless of how long you have been in business, you need to be keeping good records and planning for future needs. Obtaining an SBA loan is not a quick process. Your documents must be in order to get started on the process.
There are other requirements that will be spelled out in the loan documents.
The money obtained from 504 CDC loans includes purchasing real estate for your business or to build a new structure. The money can also get used to rehab an existing building. You can also use the money for upgrades to your property such as streetscapes, landscaping, and even adding a parking structure.
The money cannot get used for working capital, nor can it get used to repay existing debt.
The CDC will have specific requirements which include job creation. The jobs most likely will need to be permanent positions that have a set financial impact on the community.
Hiring temporary employees for construction projects, typically do not count as job creation. Therefore, will not meet the requirements of the loan.
People often do a comparison of SBA 7a vs 504 loans. These are two very distinct loans. One difference is in the amount of money that can be borrowed.
With an SBA 7a loan, the minimum is $50,000 and the maximum is $5 million dollars. These loans do not have the same requirement uses as the 504 loan.
Because the SBA 504 Loan is for commercial real estate or equipment the amount you can borrow differs. The minimum is $125,000 and the maximum is $20 million.
The repayment terms for an SBA 504 loan is dependent upon the purpose of the loan. If you are borrowing the money to buy real estate you will have 20 years to repay the loan.
The interest rates for the loan are at a fixed rate once you close. It is important to pay close attention to what is happening in the markets during the loan process. Fluctuations can significantly impact the calculation of the CDC portion of the loan.
In cases where the money was used to buy equipment, the repayment term is reduced to 10 years.
Like with most loans, to make a major purchase, the item you are buying or investing in becomes the collateral for the loan. The 504 program is no different. If you default on the loan the lenders will need some reassurance they can recoup their losses.
Although the loan is partially guaranteed by the SBA, it does require personal commitments from principal owners in the company. This means if the company defaults the owners can be held personally liable for repayment.
Several scenarios could play out if you default on a 504 loan. First, the lender will foreclose on the real estate securing the loan. What happens from there depends on how much of the debt the foreclosure covers. In many cases the foreclosure will cover the lender's liability but not the CDC/SBA's position. At that point the CDC/SBA will come to you as the personal guarantor to pay the deficiency. An offer in compromise, wherein you agree to pay a percentage of the debt, may be feasible. If you pledged your house or other personal real estate as collateral, the situation becomes much more complicated. The CDC/SBA could foreclose on your real estate and any compromise becomes much more expensive. Alternatively, you could work out a payment plan to pay the deficiency back over time in full.
CDC Loans have helped many small businesses to expand within their communities. Whether you are looking to build in a community development zone or provide your services, an SBA 504 Loan can get you the capital needed.
However, if a default occurs and the CDC/SBA look to you to pay a large debt, it is time to obtain assertive, experienced legal counsel.
Click here for a case evaluation.
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 for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
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.
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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