Small Business Administration (SBA) loans offer a range of benefits - low interest rates, flexible repayment terms, and access to capital from a few thousand dollars up to $5 million. But what if, despite your best efforts, your business can no longer make the loan payments?
To understand what happens next, it's important to look at how these loans are structured.
The SBA itself doesn't lend the money. Instead, it works with a network of approved lenders - typically banks - while guaranteeing a significant portion of the loan. For loans of $150,000 or less, the SBA backs up to 85%; for loans over $150,000, the guarantee is up to 75%. This reduces the risk for lenders, allowing them to offer better terms.
If you default on an SBA Economic Injury Disaster Loan (EIDL) or a standard SBA 7(a) loan, the first step will usually be contact from your lender. They may offer solutions such as loan restructuring or interest-only payments for a temporary period.
If no resolution is found, the lender may begin assessing late fees, details of which are in your loan agreement. They may also move to collect any collateral you pledged, such as business assets, accounts, or real estate.
If a personal guarantor was included in the loan agreement, they may also become liable for repayment. In more severe cases, the SBA or the lender may initiate legal action against the borrower and any guarantors.
When recovery efforts by the lender fall short, and collateral and guarantor payments don't cover the balance, the lender will file a claim with the SBA for the guaranteed portion. The SBA pays that amount to the lender, but their involvement with the borrower doesn’t end there.
After fulfilling the guarantee, the SBA will pursue repayment from the borrower for the amount it paid out. If your financial situation improves, repayment is expected. Otherwise, you can propose an "offer in compromise" - a settlement for less than the full balance.
The SBA will evaluate your financials and may accept the offer, issuing new repayment terms. If rejected, you’re allowed to revise and resubmit a better proposal.
If the SBA declines your final compromise offer, it may transfer the account to the U.S. Treasury Department for further collection efforts. The Treasury has broad authority - it can garnish wages and seize tax refunds to recover debts.
However, you may still negotiate a compromise settlement with the Treasury. Accepting this can result in a new, more manageable repayment plan.
Although there is technically a six-year statute of limitations for SBA loan defaults, tax professionals warn that legal loopholes may allow the government to pursue collection efforts beyond that timeframe.
Defaulting on a government-backed loan can have serious financial consequences. To help avoid this situation, business owners should:
No entrepreneur wants to face loan default. But should it happen, there are avenues to negotiate and move forward. Ultimately, it could serve as a hard-earned lesson in financial resilience.
How hard is it to get an SBA Loan?