The 5 stages of failing to repay your government-backed loan.
Your business was one of the few that could qualify for a Small Business Administration (SBA) loan. But it hit an unexpected snag and is struggling to pay it off. What happens next is different than what might happen if you defaulted on any other type of business loan. That’s because it’s backed by the federal government and requires a personal guarantee on top of your collateral.
What happens if I default on an SBA loan?
There are several steps to defaulting on an SBA loan involving both your lender and the government. That’s because the SBA doesn’t actually issue your loan, but backs it up to 85%. This means that the SBA covers up to 85% of the amount you borrowed when you default. But it’s not as straightforward as it might sound.
Each lender has different procedures it follows when an SBA borrower defaults. Here’s what you might expect to happen.
1. The lender sends a notice
The first step most lenders take is to reach out after you’ve missed a few payments. Typically, you’ll receive a letter or phone call letting you know that your repayments are overdue.
Many lenders are willing to work with businesses to prevent you from defaulting at this stage. They might work with you to renegotiate your repayment plan. Some could even offer interest-only repayments for a few months if it looks like your business is experiencing a temporary loss of profits.
The default process ends here if you’re able to reach an agreement with your lender. Otherwise, it starts the collections process.
2. The lender seizes collateral
The SBA isn’t the only one securing the loan. If you backed your loan with collateral, your lender takes steps to collect that first. If your collateral doesn’t cover the amount your business owes, your lender could force your business to close and sell off anything of value.
It can also typically withdraw money from the bank account linked to your loan account to cover overdue repayments. Or, it can get a judgment from a court allowing it to withdraw from your business accounts at other banks.
3. The lender goes after your assets
Since the SBA requires a personal guarantee from business owners with more than a 20% stake in the company, the lender could come after your personal assets next. Typically, it sends a letter to all guarantors asking for repayment. If the guarantors don’t respond, the lender could file a lawsuit.
So what happens when the lender goes after your assets? If your home was part of your personal guarantee, it could seize that property — though it might decide it’s not worth it if you’re still paying off a mortgage or home equity loan. You could also lose other assets like your retirement and bank accounts.
4. The SBA requests an offer in compromise
When your business and guarantors aren’t able to repay the full amount, your lender turns to the SBA to get funds to cover their guaranteed part of the loan. At this point, the SBA pays off your lender and takes over the collections process. Typically, the SBA sends you a letter demanding payment or an offer in compromise (OIC) within 60 days.
Submitting an OIC involves filling out a form proposing to settle any debt for a lower amount than you originally owe. You must offer proof that you’re able to repay the settlement amount and include a complete list of your assets and debts. Your lender then reviews your OIC and submits it to the SBA. Both must agree to the terms.
If the SBA accepts your OIC, you can pay off the settlement amount. Otherwise, you could submit another request. If not, the SBA turns your case over to the US Treasury Department.
5. The US Treasury Department takes over collections
The US Treasury Department can take more extreme measures to collect the amount you owe once it takes over your case. That’s because there’s no legal limitations to how long they can collect funds, and they don’t need a judgment. They might garnish your wages, take away your Social Security and other retirement benefits or withhold your tax refunds until your loan is paid off.
How do I know when my SBA loan is in trouble?
If you’re only a few days late on your loan repayment, you probably don’t need to worry. Typically, lenders have a grace period of 10 to 15 days before they start charging late payment fees.
Different lenders have different policies, however. Review your loan contract to find out when late fees apply and when it considers your loan in default.
I want to refinance. What are my options?
You could get a new business loan to refinance your current SBA loan. Keep in mind that your business will need to be have the cash flow to afford the new monthly payments. Refinancing to a longer repayment term could lower your monthly payments, but you could end up ultimately paying more in interest.
Compare business loans for refinancing
My business is struggling. What can I do?
No matter what stage you’re in, staying in communication with your lender is key to making the best of the situation. It’ll give you a better grasp of what your options are moving forward and help prevent your lender or the government from taking more drastic measures.
Before you miss a payment
Reach out to your lender as soon as you think your business won’t be able to make a repayment on time. If it’s a one-time incident, there’s a chance your lender agrees to push back your payment’s due date. Or you might just need to pay a late fee and move on.
Otherwise, you could try renegotiating the terms of your business’s loan to avoid missing any more repayments. Typically, you need to provide documentation proving that you aren’t able to repay the loan according to its current terms. This can include balance sheets, tax returns, financial projections and profit and loss statements.
After you miss a payment
Stay in contact with your lender throughout the collections process. If your business and its owners really can’t pay off the loan with their assets, you might want to take steps to negotiate a settlement before it goes to the SBA.
Can’t negotiate a settlement with your lender? In this case, consider hiring a lawyer that specializes in business debt settlement to help you build a strong OIC and navigate the next steps. Otherwise, you could end up losing your future wages and retirement savings if the SBA sends your case to the US Treasury Department for collections.
While the government guarantee might make defaulting on an SBA loan sound less risky than other types of business financing, you still have a lot to lose. When your business hits a snag, reaching out to your lender as soon as possible can help you avoid drastic steps like closing your business or foreclosing your home. Otherwise, you could end up paying for your failing business well into retirement.
Want to learn more about how business loans work? Visit our business loans guide to bone up on the basics.