What Happens If I Don’T Pay My Sba Loan

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You had every intention of paying back the Small Business Administration loan you took out to expand your company. But you’ve experienced some hardships and sales are weak. You are currently facing an SBA loan default because you are unable to make payments, which would likely mean the end of your company.

According to a NerdWallet study, this circumstance is not unusual: 1 in 6 SBA 7(a) loans issued from 2006 through 2015 weren’t repaid, with the average failing loan taking close to five years to reach the default status.

Here are some possible outcomes for small business owners who are in default on an SBA loan, as well as what to expect.

If you stop paying on your loan, it will go into default. The amount of time you have to pay before defaulting depends on the terms of your SBA loan contract. Though, in general, you will have between 90–120 days to resume payments. During this grace period, lenders may be willing to work with you.

When is your SBA loan in trouble?

Although the SBA does not lend money directly, it does guarantee up to 85% of the amount for lenders who do. When dealing with an SBA loan default, you should contact the lender who originated your loan.

Charles Green, managing director of the Small Business Finance Institute, which educates and mentors commercial lenders, says that after a 10-day grace period, lenders typically start contacting borrowers to let them know they are behind on their payments and can assess a late fee.

According to Evan Singer, CEO of SmartBiz, a provider of SBA loans, each lender has various policies and procedures for what they do when a borrower stops making loan payments.

Most banks have divisions that work with the business owner to come up with a new repayment strategy. Singer says this might entail renegotiating the terms of the loan or making payments that are only for interest for a specified period of time. Under such a plan, the loan wouldnt be in default.

Additionally, borrowers should be aware that even if they are current on their payments, they may technically be in default on the loan. Although it is rare, this can occur if a business owner disregards the conditions of the loan, according to Green. Examples include failing to provide tax returns for each year of the loan, taking on additional debt, or not obtaining the lender’s consent before bringing in new shareholders.

How the lender may try to collect

When a government small business loan defaults, the lender will make every effort to recover the entire amount from the borrower, only bringing in the SBA’s guarantee if those efforts are unsuccessful.

The property that the borrower pledged as collateral for the loan is subject to seizure by the lender. These could be business bank accounts, stock, machinery, or real estate.

According to Singer, banks will adhere to their standard operating procedures to make sure that the collateral can repay the loan.

For SBA loans, borrowers must also sign a personal guarantee, as do those who hold key management positions and own 20% or more of the company. A personal guarantee is a written declaration that, in the event that your company is unable to repay the loan, you personally will do so.

This means that the lender has the right to pursue the collection of the personal guarantees given by the business owners if the collateral the business owns is insufficient to cover the outstanding loan balance.

“They can file a lawsuit in state court and send demand letters to the guarantors asking for payment for the shortfall,” says Green.

With a personal guarantee, lenders may attempt to sell the borrower’s individual possessions, including real estate and bank accounts, but Singer notes that state laws differ.

In the event of your default, the lender will report the loss to the SBA in order to uphold its guarantee. Up to 85% of loans up to $150,000 and up to 75% of loans over that amount are guaranteed by the SBA.

According to Singer, if this occurs and the federal government incurs a loss on the loan, it may pursue additional options to recover the loss, such as garnishing the borrower’s wages or freezing their bank accounts.

What to do if you’re struggling

The best course of action is to keep your lender informed of your efforts to repay the loan by keeping lines of communication open.

If you’re struggling to make payments or suspect you will default, call the lender before they call you Try to devise a strategy to determine how to pay back the loan without defaulting, advises Singer.

A loan that is guaranteed by the federal government is especially risky to default on, Singer advises.

According to Green, efforts to pay back the loan may include increasing sales, selling off property or equipment, or even closing or selling the business.

Green claims that some people become overly emotionally invested in it and simply ride that ship over the waterfall because they are unable to let go. “For better results for everyone, having a realistic approach to managing the situation is essential.” ”.

If you’re going to default on a loan or wish to reach a settlement with the SBA, you may be able to settle for less than the full amount you owe through an offer in compromise. If you go this route, consider hiring an attorney who specializes in business-debt settlement.

How Much Do You Need?

Author bio: Steve Nicastro is a former NerdWallet expert on small business loans and personal loans. The New York Times and MarketWatch have published articles about his work. Read more.


What happens if you don’t pay back an SBA loan?

Failure to repay the SBA Loan First, the lender will demand payment from the business for the remaining loan balance. However, the lender will foreclose on the business’s pledged collateral if the borrower is unable to make the full payment. Your business assets may not have much value.

Can you go to jail for defaulting on an SBA loan?

SBA loan fraud is a serious issue. Depending on the severity of the charge, people accused of loan fraud could receive up to 30 years in federal prison. Even though times are hard, it’s crucial to consider why a loan is necessary and whether there are any other ways to get the money needed.

Do SBA loans have to be paid back?

Key Takeaways. Small businesses can grow their operations with SBA loans for long- or short-term capital, asset purchases, or startup costs. Small businesses are required to repay loans from SBA partner lenders that they receive.

Can you get in trouble for SBA loan?

False statements can lead to severe criminal penalties when used to obtain an SBA loan. If found guilty of a federal crime involving loan fraud, they could spend time in prison and pay hefty fines.