It’s not exactly a thrilling caution-to-the-wind trip to Las Vegas, but taking out a loan is always a gamble. We can make assumptions based on current data and trends, but no one truly knows what the future holds.
Your SBA loan application might have been pristine, your business growth a sure thing, your intentions just, but calamity comes out of the blue and changes everything.
No one truly knows if you’ll be able to make good on the repayment promises agreed upon with the lender - there is always risk involved for both parties.
On average, between 2006 and 2015, one in every six SBA loans wasn’t paid back in full. That’s the reality of the situation, and the lender knows this.
So, what happens if disaster has struck, and you’re struggling to make the agreed-upon repayments?
The first thing that will happen is your loan will be flagged as delinquent. This is essentially a first warning. The lender may classify the loan as delinquent even if you’re only late on a single payment by a day.
Once delinquency has been established, the lender has the right to apply loan-based punishments such as charging late fees or increasing the interest rate.
It’s important to note that even if your SBA loan has a fixed interest rate, late or absent payments give the lender authorization to alter the agreed-upon APR - pretty scary, huh?
Fixed interest rates protect you from fluctuations in the prime or other index rates, but ultimately, the lender is always in control.
Although this seems like a pretty harsh reaction to a payment that might be delayed by as little as an hour or two, it's based on the idea that the lender has already done whatever they can to help you. They might have already…
- Offered low failure-rate payment methods, so the transfer always completes on time.
- Increased payment visibility, so you know how long payments take to process and when they’re successful.
- Provided accurate and supportive payment information, so you can see in a clear and accessible way what you’ve paid, what you still owe, how repayments are broken down, and when your payments are due.
- Created payment reminders for every phase of the repayment term, eliminating the chances of you forgetting to pay manually.
- Made it easier to retry failed payments. Sometimes there are technical issues, so a lender may be lenient in certain circumstances.
In the event the lender has offered all this support, in their eyes, late fees or increasing interest rates are the natural progression if the borrower still fails to make payments on time.
That said, most lenders that operate via the SBA will give borrowers a 10-day grace period, during which borrowers may still incur late fees, but the loan will not be made delinquent.
Once delinquency has been established, there’s no way to get it removed, and it will remain on your credit score for 7 years, but you can prevent further ramifications of delinquency by keeping up on all future payments.
The Switch to Default
If your delinquency continues for a certain amount of time due to you making late payments repeatedly or missing them altogether, your loan will enter default status.
How long the transition takes between delinquency and default depends on the loan and the lender, but for SBA loans, it’s typically something to the tune of 120 days.
Default status is not pleasant. It officially marks the beginning of forcible loan collection procedures. What these procedures entail depends on the specifics of your loan agreement, but they will always start with a phone call and an email.
As business loans don’t fall under the same non-contact rules as FTC-based loans, the lender will be able to act as they deem necessary to get your attention.
They will update you on the transition from delinquency to default and warn you of impending events.
The bank will then be given the green light to seize any assets you laid down as collateral when you were hammering out the fine points of the contract.
They’ll start with business assets, and then, should there still be debt, move onto your personal assets.
If your business has completely run into the ground and there are no assets to seize, the personal guarantee will be invoked, and the lender will move straight onto your personal assets.
Alternatively, if you do have remaining business assets, you may be forced to sell them off yourself, at which point, the lender will acquire a court order to seize all the funds from your business accounts.
In the event that the loan still hasn’t been repaid in full after taking all there is to take, the lender will contact the SBA requesting their guarantee.
The amount the SBA pays out will be whatever was agreed upon in the contract minus the amount the lender has sourced from seizing your assets. The lender isn’t trying to make a profit from the SBA.
They just want the standard loan returned plus the agreed-upon interest; however, if the interest rate has gone up due to delinquency, they’ll claim the excess too.
As unpleasant as this whole process has already been, it’s really only just beginning.
The lender may be satisfied, but now you’re indebted to the SBA who will contact you in the form of a “60-day demand letter”. This letter requests payment and demands a response within 60 days.
Inability to pay what the SBA is requesting will lead to you making what’s known as an “offer in compromise”. This is essentially an appeal to the SBA for leniency in order to help you eventually pay off the debt.
This will then trigger an amicable discourse between you and the SBA as you work together to figure out some sort of payment plan or arrive at a lump sum figure that will cover your debts.
Before a reasonable accord can be met, you must prove your inability to pay your debt.
You’ll need to collate tax returns, any remaining assets, income statements, expense reports...anything that illustrates you are currently unable to repay them.
Once the evidence has been processed and approved, the SBA will understand that a lenient repayment course is the only reasonable way forward. I know it's a stressful time, but you’ll need to give this appeal everything you’ve got.
If you make an especially strong case, the SBA may agree to a payment plan that amounts to less than you actually owe - an essential crutch at this point.
Failure to secure an amicable deal with the SBA leaves you in a dire situation, and at this point, you may want to consider filing for bankruptcy. You won’t get any of your seized assets back, but it will void any outstanding SBA debt.
If you cannot make repayments, the SBA denies your appeal, and you do not file for bankruptcy, the case will be handed over to the Treasury Department.
This is when things get really ugly because the Treasury Department doesn’t mess around or mince words. They’re going to get what they’re owed no matter what it takes.
They will take one of or a combination of the following actions:
- Wage Garnishing - A process by which a fraction of any money you make is automatically siphoned away before it hits your bank account.
- Freezing Accounts - You will be unable to take any money out of your accounts or set up any new ones.
- Withhold Future Tax Refunds - Instead of receiving those tax rebates we all know and love, yours will be held by the government in recompense for your outstanding debts.
- File a Suit Against you in a Civil Court - If you lose this case (which, unfortunately, you will), it opens up more legal ways in which the money you owe can be forcibly taken from you.
Once proceedings have been taken over by the treasury department, it's a difficult situation, but it’s not impossible to come to some sort of settlement where a new repayment plan is drawn up.
However, the longer you leave it, the harder coming to an accord with the treasury department will be.
Nine times out of ten, it’s going to be much easier to secure that initial offer of compromise with the SBA, so your best bet is to bring your A-game early on in the proceedings.