What Happens If You Can’T Pay Back Eidl Loan

Many small businesses have relied heavily on help from the Small Business Administration (SBA), especially during the COVID period. Financial assistance, in the form of loans to small businesses, is one of the main types of support that the SBA offers.

During non-emergent times, getting an SBA loan can be difficult. They have stringent requirements for the kinds of businesses they will lend to and demand a lot of paperwork. Some of these limitations have been eased as a result of the COVID-19 pandemic, and the SBA, which manages the Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP) loans, The SBA has greatly streamlined the application procedures in response to the need to provide funds to businesses quickly, which has increased the prevalence of SBA loans.

Of course, many small businesses are having difficulties in this period of economic uncertainty caused by COVID. This could result in more business owners having trouble repaying their SBA loans and defaulting on them. We’ll clarify what that means, what effects it might have, and what you can do to address it.

Have I Defaulted On My SBA Loan?

Understanding whether you have “Defaulted” on your SBA loan or are merely “Delinquent” is one of the first things to do. Which of these two states best describes you will determine what you should do next.

“Delinquent” means you’re behind on your SBA loan repayments, but your lender still believes you will be able to repay some, or all, of the loan amount

If a lender determines your small business will be unable to repay your loan, then they may decide you have “Defaulted” on it.

For each designation, there are various factors to take into account and actions to take.

Who Decides if I Have Defaulted or if I Am Delinquent on My SBA Loan?

When the SBA lends money to a small business directly, they determine when payments are past due and when you are in default. The majority of the time, however, they do so through affiliated banks and financial institutions, where they typically “guarantee” the loans for lenders to lower their risk.

In those circumstances, the lender—likely your bank—will decide whether you are in default or delinquent.

How Do I Deal with a Delinquent SBA Loan?

Simply put, a delinquent SBA loan is one for which you have fallen behind on payments. You will receive a written notice from your lender or the SBA notifying you that payments are past due and requesting that you make repayments as soon as possible. Although the process will differ depending on the lender, the following is what you can generally anticipate:

The lender will assess a late fee for failure to pay.

They will contact you to arrange for repayment.

You can explain if you are having difficulties repaying.

They may restructure the terms of your loan or look for another solution.

In many circumstances, it makes sense for you to get in touch with your lender as soon as you suspect a payment will be missed. Your lender may be more flexible if you seek assistance sooner rather than later.

What Type of Solutions Might I Have for Repaying a Delinquent SBA Loan?

Ultimately, the lender wants you to repay what you owe. Due to this, they might be willing to work with you on a repayment plan. This might include:

Restructuring your loan over a longer length of time to reduce monthly repayments.

Advising you to review your cashflow and expenses to free up more money for repayments.

Allowing you to repay only the interest portion of your loan while you reevaluate your small business finances.

Always try to make at least some payment because a lender will typically want to see one within 30 days of contacting you.

What is the Impact of Not Making Repayments Quickly Enough on a Delinquent Loan?

The likelihood of a delinquent loan having an impact will depend on how quickly or whether you make repayments at all.

Not making a payment on schedule may result in the loan being marked as “late” on your business or personal credit report.

Repeatedly missing loan repayments will result in more derogatory marks on your credit report.

Failing to repay your loan for a period of time (typically 90–120 days) will result in your loan going into default.

Your credit score will drop if there are any negative items on your personal or business credit report, which could affect your future ability to obtain financing.

What Happens If I Default On My SBA Loan?

Your loan will become defaulted if you repeatedly fail to make payments and are unable to work out a plan with your bank or the SBA. This will likely result in the following:

Your collateral is at risk: When you originally applied for your loan, you may have needed to offer business or personal assets to secure the loan. When your loan goes into default, the lender has the right to seize and sell those assets to get some or all of their money back.

Others’ collateral may be at risk: If other people signed a guarantee on the loan, then their assets are also at risk of being seized and sold.

The SBA will demand repayment: The SBA will become involved in asking for repayments (if they were not already) and will issue a demand letter.

The SBA or your lender will take legal action: If you are not able to repay any money within a certain amount of time, the SBA will go through your business (and possibly your personal) finances. If they can identify money that can be used to repay the loan, they may start legal proceedings.

Your credit score will be impacted: Your business and personal credit reports will show that your loan has gone into default.

What Type of Solutions Might I Have for a Defaulted SBA Loan?

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Offer to pay at least some money towards settling the loan as this shows goodwill.

Be prepared for legal action and for the SBA to garnish your business earnings to repay the loan.

If you genuinely cannot repay the full value of the loan, you can fill out an “Offer in Compromise” form and send it to an SBA Loan Officer. These forms will require in-depth information on your finances and will set some amount that you are able to repay.

Send the Offer in Compromise to your lender and the SBA. If it is accepted, they will set a date for you to make final payment, and the loan will be closed.

Do You Have Any Advice for Reducing the Possibility of Becoming Delinquent or Defaulting on an SBA Loan?

Yes, here are some starting points:

Get on top of your cash flow and start to build an emergency budget.

Prioritize your SBA loan repayments over other types of less important expenses.

Reduce the money you are taking out of the business to free up funds for repayments.

Reduce your fixed and variable business expenses as much as possible.

If you don’t think you’ll be able to make repayments, contact your lender and the SBA as soon as possible.

Keep rigorous details for both your business and personal finances.

Look at consolidating existing business loans under better terms to free up money for repayment of the SBA loan.

Speak to an accountant or business attorney to understand your options and what you can do financially to stay on top of repayments.

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FAQ

Will the EIDL loan ever be forgiven?

EIDL loans cannot be forgiven. However, EIDL loans do have a deferment period. The maturity date of any EIDL loan approved in 2020, 2021, or 2022 may be postponed for up to 30 months. While not required, full or partial payments can be made now.

What happens if I default on a EIDL loan?

This means that you will no longer be subject to administrative wage garnishment, tax refund offset, etc. Be aware that if you don’t pay back your loan in full, you might not be able to borrow money from any federal institutions in the future.

Are EIDL loans required to be paid back?

Even if they are later rejected for an EIDL loan, the borrower will not be required to repay the Emergency EIDL Grant. The SBA will demand that the borrower submit a certification under penalty of perjury stating that they are qualified to apply for an EIDL loan prior to disbursing the advance payment.