Taking out an SBA loan is a popular way for people to take their small businesses to the next level. On paper, they’re a great idea - but if you happen to find yourself experiencing an unexpected hardship, or if your sales take a dive, SBA repayments can easily become difficult to keep up with - and this particular situation is not uncommon.
If you’re currently struggling to repay an SBA loan, you’ve made an awesome choice to click on this article today. Below, we’re going to do our best to talk you through the process of what happens after an SBA loan defaults, as well as some possible solutions that can help get you back on the straight and narrow.
Whenever you’re ready, grab a pen and paper so you can make notes, and stick with us as we talk you through the process of what to expect if your SBA loan defaults, as well as some possible solutions you can do to get back on track. Let’s jump in.
At what point does an SBA loan fall into arrears?
Before we get any further, we think that it’s important to highlight the fact that a defaulted SBA loan is not something that is out of the ordinary, and there are many other people who have experienced this, too. According to a report, across 2006 and 2015, on average every 1 out of 6 loans were not paid back, with the average period of around 5 years before going into default.
Additionally, it’s highly important to remember that SBA isn’t a lender, instead, it guarantees up to 85% of a loan to lenders who make up SBA loans. For this reason, if you ever find yourself dealing with a defaulted SBA loan, then you will need to go directly to the lender who has loaned you the loan.
As a side note, if you’re a little bit unsure of who your loan lender is - there’s no need to panic. You will be able to find all of the information you need in the contract that you would have signed upon opening your SBA loan, and if you’re really stuck on who your lender is, you could of course reach out to SBA for some further help on this.
Generally speaking, lenders will typically begin to let you know if you are late on your loan repayment after a grace period of around 10 days, although do keep in mind that grace periods will vary from lender to lender.
After the grace period has passed, most lenders will send you a courtesy letter or email to let you know that you have missed your payment and need to make it immediately, however, there are some lenders that may also charge a late fee alongside the agreed regular repayment amount.
To reiterate, each SBA lender will have their own unique procedures and regulations for what they then do after a borrower begins missing payments.
How Lenders May Try To Collect Payments
After the grace period has been missed and payments are not being made, most lenders will then proceed to try and contact you to check in on your current situation.
Most lending banks have their own specialized department team that has been specifically trained to work with borrowers to understand their current situation and how things can move forward, and the solution is usually a new repayment plan.
In these sorts of situations, if the lender and borrower are able to come to a new agreement on repayments, the loan will not default because of the new agreement, which will have been tailored to accommodate the lender’s new situation.
So, what happens if the loan defaults? Usually, if a government small business loan gets marked as a default, then the lender will directly contact the lender to try and collect the full amount from the borrower, and then immediately close the loan account. However, if the borrower is unable to pay off the full amount of the loan, then SBA’s guarantee will then be acted upon.
If the lender chooses to act upon the SBA guarantee (which will have been agreed upon between the lender and borrower while opening the loan), it means that they will have the right to seize the assets of the borrower to make up for the remainder of the loan that has gone unpaid.
This can include a variety of different things, including but not limited to business equipment, real estate, stock inventory, and even business bank accounts.
In addition to this, borrowers who own 20% or more of the business may also be required to sign a personal guarantee when opening up an SBA loan. This is essentially a written promise that will mean the borrower is agreeing to pay back the loan personally if their business cannot.
In these instances, the personal assets of the borrower can be seized by the lender, and if a guarantor is involved, they may also be sent letters demanding repayment.
What You Can Do If You’re Currently Struggling
The most important thing you can do if you’re struggling to make repayments is to reach out to your lender and let them know what your current situation is. We urge you to do this as soon as you can, as it means that your lender will be able to understand what you are currently going through, as well as work with you to reach a new payment agreement before your loan falls into arrears and defaults.
However, if your loan has defaulted, it’s very important that you take a realistic approach to the situation. Many people find it difficult to let go of a business that has taken a dive, and this can cause even more problems in the long run.
By reaching out to your lender and making a default settlement with SBA, you may even be able to settle for less due to having a proactive approach to solving the problem at hand. This is something that is called an offer in compromise and is a very common solution for SBA loans that have defaulted.