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SBA loans are also guaranteed by the U.S. government, meaning that lenders experience less risk when lending to small businesses.
The U.S. Small Business Administration (SBA) loan program is popular with small business owners because of its generally excellent repayment terms and rates. However, it is possible to default on an SBA loan and it can have serious consequences for a small business owner.
Read on to find out more about what happens if you can’t pay your SBA loan back.
Page written by Kat Cox. Last reviewed on April 23, 2024. Next review due October 1, 2025.
Getting an SBA loan can be a great day for a small business that needs financing. But in uncertain economic times, some small businesses may find it hard to repay their loans. This can lead to what’s known as a loan default, meaning that the company has failed to meet the terms of the loan – most importantly, repayment.
Once you’ve defaulted on your SBA loan, the lender will do everything it can to get the repayment back. The first step they will take is that they’ll try to seize your collateral. This is whatever inventory, equipment, real estate or even business equity you promised to secure the loan. The lender may also have a right to your personal assets, such as your home, bank accounts or car, depending on the terms of your loan agreement.
If the lender can’t recover the cost of the loan from seizing your collateral, they will usually file for the SBA guarantee. This means that they’re asking the SBA to repay the part of the loan that was guaranteed by the federal government – usually up to 80% of the loan.
In spite of the loan guarantee, the SBA may then try to collect on the debt from the borrower. They’ll send you a 60-day demand letter asking for you to repay them. After 60 days, they’ll submit the account to the U.S. Treasury Department.
You can also submit an offer in compromise (OIC) which is usually a lump sum payment or a payment plan that you know you can meet. In order for your OIC to be accepted, you’ll need to be able to prove that you can’t repay your loan under its original terms, and that you’ve gone out of business and sold your assets to try and pay down your debt.
If the SBA does send your account to the U.S. Treasury Department, they may withhold your tax refunds, wages or any other government benefits to recoup the cost of the loan from you. You may be subject to a lawsuit, as well.
In order for your loan to be considered in default, a few things have to happen. First, before it’s considered defaulted, your loan will be determined to be delinquent. This means you’ve missed a payment or two on the loan.
Your lender will determine if you’ve defaulted on your SBA loan. This usually occurs if you haven’t responded to their requests for payment after three or four months.
If you are behind on payments for your SBA loan but aren’t yet in default, it’s important to contact your lender right away. Many lenders are willing to accept a new payment schedule if you need more time or to make smaller payments. It’s much better to address the delinquency with your lender than to have your loan go into default.
Usually, your SBA lender will reach out once your loan is delinquent to see what’s going on and demand payment. They will most likely add a late fee as well.
It’s always a good idea to contact your lender to discuss what options are available for a delinquent loan. They may be willing to restructure your loan terms so that you can repay it.
If you don’t respond to your lender in a certain period of time (usually a couple of months), they will consider your loan to be in default.
If you aren’t repaying your loan quickly enough, you may get a “late” payment on your credit report, which can hurt your credit score. These are also known as derogatory remarks, and the more of those you get, the more your personal and business credit will suffer. If you continue to miss payments on a loan that is already delinquent, it may go into default.
It’s better to communicate with your lender than to hide from them. Many lenders are willing to renegotiate payment structures to help you pay the loan back. You may also submit an OIC to the SBA and your lender to find an alternative way to repay your loan if you have gone out of business. You should also be prepared for the lender to try and collect the collateral you promised to secure the loan if you can’t repay it.
The best way to reduce your chance of defaulting on an SBA loan is to make sure you only take out a loan that you can afford to repay. This means examining the terms and interest rates carefully and really understanding your business plan. Most lenders will do this due diligence themselves and not approve a loan that is likely to default in the first place, but it still happens.
Other ways to avoid defaulting on an SBA loan are to build emergency funds in case your business goes through a dry period. Try to prioritize repaying your loan by reducing the money you spend on your business in other areas. You can also try to consolidate other debt to get better repayment terms and free up money to help you pay off your SBA loan.
It’s a good idea to work with a business attorney or an accountant to get a better idea of what your options are if you’re afraid you can’t stay on top of payments. They may have advice you hadn’t considered.
Written by
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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