COVID-19 and CARES Act Update:
The CARES Act was passed by Congress and signed by the president. Part of the CARES Act included what is known as the Paycheck Protection Program ("PPP"). PPP loans are 100% federally guaranteed loans for small businesses intended for companies to maintain their payroll levels and allow partial loan forgiveness. The loans are available until June 30, 2020 for eligible companies to cover the cost of:
- Health care benefits and related insurance premiums
- Employee compensation (with some limitations for employees with salaries over $100,000 and exclusions for employees based outside the U.S.)
- Mortgage interest obligations (but not principal)
- Rent and utilities
- Interest on debt incurred prior to the loan
On August 11, 2020, the SBA published Frequently Asked Questions (FAQs) regarding the PPP Loan Forgiveness process which you can access here: SBA PPP Loan Forgiveness FAQs
To assist small businesses navigate the PPP loan forgiveness process, Biz2Credit developed a PPP loan forgiveness tool (https://www.pppforgivenesstool.com/) as a free resource to use.
To apply for loan forgiveness for the SBA PPP Loan program, you are required to complete the U.S. Small Business Administration Form 3508
The SBA Loan
The United States Small Business Administration supports small businesses across the country by offering learning resources and funding opportunities. One of their most popular funding offerings is the SBA loan program.
Several kinds of SBA loans exist to help businesses meet their goals from buying new equipment to purchasing land. Businesses usually grow from these loans and use their profits to pay back what they borrowed, but this isn’t always the case.
Only about 1 in 6 SBA 7(a) loans are not paid back. Owners defaulting on their loans may want to try applying for SBA loan forgiveness to lessen their debts.
Learn all about the SBA loan forgiveness program and how it works below.
SBA Loan Forgiveness
What Is an SBA Loan?
An SBA loan is a small-business loan. It’s granted by the U.S. Small Business Administration and then issued by a bank or other participating lender.
An SBA loan of $150,000 or less comes with a guarantee of up to 85%. The SBA loan guarantee for loans over $150,000 is up to 75%.
There are four main types of SBA loans in the U.S. including:
- Microloans of up to $50,0000 given for starting a business, buying equipment or inventory, and working capital. Community-based nonprofit organizations process microloans.
- The 7(a) loan program, the original SBA loan program, with a federal guarantee on loans up to $5 million. 7(a) loans are used for equipment purposes, working capital, and business expansion. Specialized lenders, credit unions, and banks process 7(a) loans.
- The 504 loan program with federally guaranteed loans also up to $5 million for buying facilities, land, and machinery. Nonprofits and private-sector lenders process 504 loans.
- Disaster loans of up to $2 million available to small businesses affected by emergencies like a natural disaster. The SBA processes disaster loans.
The original 7(a) lending program remains the most popular.
Who Needs SBA Loan Forgiveness?
Not every business that takes out an SBA loan succeeds. If you find your business is not turning a profit and you default on your SBA loan, you should consider SBA loan forgiveness.
After missing your first payment, you likely receive a late notice from your lender after about 10 days. Most lenders charge a late fee, so if you still can make a payment expect an upcharge. Try to keep a record of your payments because not every lender will alert you when you’ve missed one.
Before contacting the SBA, the lender will first attempt to collect from the borrower.
Some lenders will attempt to refinance the SBA loan or work out a new loan repayment plan. They might offer interest-only payments for a short time or a complete loan restructuring. This is not considered defaulting on the loan.
Only businesses that actually default on their SBA loan can apply for loan forgiveness. Be aware that you may default on a loan without being behind on payments. This happens when you violate the terms of the loan like:
- Taking on additional debt
- Not seeking approval from the lender before accepting new shareholders
- Failing to provide yearly tax returns for the life of the loan
Defaulting on a loan due to a lack of repayment is much more common than violating the loan agreement terms.
How Does the SBA Loan Forgiveness Program Work?
Business owners defaulting on their SBA loan can apply for loan forgiveness, but that does not guarantee the SBA will approve the request. It is more commonly referred to as an "offer in compromise".
The SBA evaluates your case and discusses the matter with the lender. The SBA may take action, but only after the lender has tried and failed to collect on the defaulted loan. The SBA purchases back between 50-85% of the loan and then turn to the business to collect the debt.
The SBA will look to you, as the personal guarantor, to pay back the loan. If you cannot pay back the loan in full, you may submit an offer in compromise wherein you offer to pay a portion of the loan. The SBA has discretion to accept or reject your proposal.
If you cannot repay or refuse repay, the SBA may seize assets from the personal guarantor of the business. Any owner with more than 20% state in the company would have signed as a guarantor and becomes liable.
How Does the SBA Collect Debt?
There are two ways for the SBA to collect the owned money. Either through the Treasury Offset Program (TOP) or by cross-servicing.
The Treasury Offset Program (TOP) recovers the debt through the business or guarantor’s income tax refund. Rather than receive the expected tax refund, the funds automatically get applied to the SBA loan default debt.
Cross-servicing refers to when the SBA sends the delinquent loans to the U.S. Department of the Treasury’s Bureau of the Fiscal Service. They will collect the debt by:
- Sending debt collection letters
- Hiring a private debt collector
- Garnishing wages
- Unilaterally making payment arrangements
- Alerting the major credit reporting bureaus
- Opening a case with the Department of Justice
It’s better to offer as much as you can during the start of SBA loan settlement negotiations to avoid these unpleasant options.
Are There Any Drawbacks to SBA Loan Forgiveness?
When your business is failing and you’re swimming in debt, any bit of relief seems like a miracle. However, if you cannot refinance your SBA loan and need loan forgiveness, understand that it comes with a few drawbacks.
First, you must dissolve your business entirely and liquidate all business property. This helps to bring down the amount of debt owed.
Second, be aware that asking for SBA loan forgiveness negatively impacts your business credit records. It can adversely affect your personal credit as well if you signed as the guarantor on the defaulted SBA loan.
Finally, business owners who receive loan forgiveness from it SBA will find it much more difficult to get approved for federal-based business loans in the future.
Don’t Try to Resolve SBA Loan Issues Alone
Now you should have a basic understanding of SBA loans and what happens if you default on an SBA loan.
Applying for SBA loan forgiveness may seem like a better idea than filing for Chapter 7 bankruptcy, but not always. Every lender and loan is a bit different, so it can help to get a second opinion on what to do.
Don’t try to resolve SBA loan issues alone. Speak to an attorney with the Protect Law Group!
The Protect Law Group has proven, nation-wide experience negotiating SBA debts and helping businesses file for bankruptcy.
Owe more than $30,000? Contact the Protect Law Group today for an SBA loan case evaluation