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SBA Loan Default: Any Suggestions?

Posted by Charles M Cooper on Tuesday, December 09, 2008

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As the man said, bad things sometimes happen to good people, and as the economy continues to slide and the politicians continue to flail around, we will be seeing more and more of that. I received this email recently and I want to share it with you:

Hello Charles,
Just read one of your articles on the current SBA position in this economic crisis. My wife and I cosigned on an SBA loan for her sister's restaurant. It went south and the loan is now in default. We are on the hook for a huge loan (her sister battled a severe cancer during the startup and that diverted all focus away from the restaurant unfortunately, and that was just one among many issues).

I am talking to the workout specialist at the bank, but I am not clear on the process. I know they will try to go after what little they can get out of the restaurant assets then our house and other assets.

I am looking for advice. I have talked to several lawyers but none gave me much decent advice from what I can tell, other than to tell me I am “you know what.”

Do you have someone or website that you can recommend that I can go to for good advice?

SBA-backed loans have eligibility standards every bit as tight as sub-prime mortgage lenders for a reason, they are supposed to be the lender-of-last-resort, offering business loans to those incapable of finding more conventional financing. This means our cosigner is in very good company when it comes to his defaulted loan. On the downside, he is also right when he says that the bank will take as much as they can from the business before going after him—and they will go after him—for the remaining debt. It is only after the business and the debtor have been bled dry that the SBA will come in with its loan guarantee and mop up the remainder.

The best option would be to refinance this debt, if that is possible. With credit tight, finding a conventional loan could be challenging. Modifying the loan, making interest-only payments for a few months, for example, is not likely to help and is a tough concession to win from the bank, which leads us back to finding a way to lower or pay-off the principle. It is time to get creative about finding funds and it is incumbent on our cosigner to do whatever he can to avoid filing bankruptcy. However, that last resort may be something he needs to prepare for.

This is a tough problem and so I am turning to the collective wisdom of America’s Best Companies entrepreneurs and asking for your thoughts and suggestions on the subject to be left in the comments section below.

If this were your problem, what would you do? If he were your brother, how would you advise him?

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Charles Cooper is the Web Editor for America’s Best Companies. He came to ABC with nearly twenty years of business and technology writing and editorial experience. In addition to ABC, Charles has been tapped to be a freelance business writer with the upcoming American edition of The China Daily, has served as a writer for HowStuffWorks.com and LovetoKnow.com and as senior editor for Gear Technology magazine. Contact Charles.

Tags: small business, economy, sba, loan, default, cosigner

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Wednesday, December 10, 2008 at 6:23 PM
Chris Elrod says:

I'm sorry to say I don't have much advise to give as I am in a similar if not worse condition myself. My wife and I started a computer store 4 years ago and up until this past year have more than doubled the income each year. That sounds good until you look at the facts. To properly start the business with the capital it needed would have took around 300K dollars. We started with 120K and all things considered did well. We were only able to take a salary for the first 3 months and have since received no income since April 2006. We have all of our money in it and have run our credit cards, credit line and second mortgage to it's limit just to survive on until the store was able to start us back on our salaries. I developed a very rare neurological disorder the second year and have been in and out of the hospital since. We have been unable to find an investor or obtain further financing and although we have somehow survived with our credit intact, we now have two weeks to close it down. Everything we own is on the notes for the business and due to my health condition, I can't get another job and because of the nature of the disease, my wife can't work because I require 24 hour assistance. We have had several close calls that almost ended my life and there is no cure for what I have. We talked the bank into refinancing our loan one more time which buys about 6 weeks before we start messing up our credit followed by foreclosures on our home and assets. I have somehow got to either find an investor who can see the potential the company has given the proper finances or find some type of work I can do from my home computer to make enough to pay off the debts and survive on. I can only pray for you as both my wife and I are now praying for ourselves. None of the government agencies will help and it seems as if no one cares. When I think of the large corporate bail outs it makes me sick to my stomach. There are many small, honest businesses that need help more than they do yet we have no options. Try talking to as many banks as you can and see if any will set up some type of structured loan you can afford to pay. Only other option is a bankruptcy and I am not sure if that would help on an SBA loan. Best of luck to you and all the other small businesses the government is turning their heads to. I guess it takes being crooked to make it in this world and I will never go there. I may end up in a shelter or a tent in the woods but I will know in my heart I tried my best and I was honest and fair.

Chris Elrod

Thursday, December 11, 2008 at 9:17 AM
al lock says:

if it were i, i would operate the restaurant and make a go of it, to let it sit by until the SBA takes it and/or other assets is just plain foolish. If i were strong enough financially to cosign a large note, i would think i had business sense enough to either operate the business, or put a competant manager in the business to make it work. You are right bad things happen to good people, but to just give up and give in is not failure, it is self defeat.

Thursday, December 18, 2008 at 3:53 PM
grapplex says:

There's a ton of good reading on SBA workouts at this blog:

http://dtod.wordpress.com/2008/12/09/yes-the-impossible-is-posssiblesba-workouts-can-work-very-well-indeed/

The blogger is very helpful for free on the phone. Can't hurt to try. Call and ask for Don or Jim.

Wednesday, January 14, 2009 at 2:48 PM
Becky says:

Nothing? No advice? We are in the similar situation. Our business is still good but cash flow has put us behind in making our SBA loan payments. I didn't realize SBA loans were for people who could not get financing anywhere else. Had I know that, I would have used the HELOC that we once had rather than the SBA.

Our small ice cream store was very successful from the min we opened. We maintained high sells for 19 months and then bam. The news started telling everyone how bad the economy was and we are in a recession. Sales started to fall off in October of last year. This impacted our cash flow. Lines of credit were max'd out and now we are struggling to meet our bills. Our business fell off about 40%. We also catered many corporate parties and events. Those gave us extra cash, but now with the recession, companies are not doing any Employee Appreciation events.

It seems banks should change their policies and work with business to modify loans. This is a unique situation. The government did not let the banks fail, why shouldn't the banks be held accountable for the money they received and modify their loan practices to help bail out small business?

Wednesday, January 21, 2009 at 8:08 AM
amos says:

please send details about tis

Thursday, January 22, 2009 at 7:12 AM
Maxwell Pierce says:

That's great, I never thought about SBA Loan Default like that before.

Monday, February 02, 2009 at 12:45 PM
Mikesimps says:

After trying to work with the banks and franchisor to lower our operating costs, a partner and I closed our business in December 2007 and committed Bankruptcy. Since all of our bills were current and taxes paid, the main issues were supply contracts, services, building lease, Franchise obligations, and SBA Loan.

The bank that holds our SBA loan has never done anything with our "offers" and has not replied after 18 mos. They have leins on both our residential property.

Since I paid $10K to principal on my first mortgage last year, I am desperate to get them off as a lein holder. I have tried to reason with them to discuss a reasonable workout. If the house goes into foreclosure, they wont get anything since the sale would barely cover the first mortgage after all the legal and realtor fees. I don't understand why they wouldn't try to get as much as they can in exchange for removing the lien? I have sent 2 letters and made several phone calls and cannot get them to discuss it. It looks as though my only option is foreclosure. I plan to stop payments next month as a last ditch effort to get them to talk to me, otherwise my family and I will be looking for somewhere to live.

Thursday, April 16, 2009 at 8:50 AM
MEW says:

Hey MikeSimps,
Are you still out there? What's the latest? Has SBA/your SBA lender begun foreclosure on home? I am in a similar position. 4 payments behind to my SBA lender. Franchise business is failing & I just may be able to keep open thru 5/09. March & now April have been such bad months that I may not have a choice but to close. Looks like bankruptcy is my only option, but don't think that will take care of my loan. Any advise from anyone out there? Thanks!

Thursday, July 23, 2009 at 9:23 PM
David says:

Is there a way to find out if the SBA has paid the bank the guarantee? I am in default on an SBA 7a loan and have been told the SBA paid the bank the 75% guarantee. This bank purchased the loan from the FDIC for about 50 cents on the dollar. Now this bank is trying to collect from me too. Isn't this double dipping? Any suggestions?

Thursday, October 15, 2009 at 8:18 PM
Debt Helper says:

I work for a bank, and my job is SBA Workout. In general, if someone has personally guaranteed an SBA loan, it's possible for to settle the debt with the SBA. In order to to that, the business needs to be closed or sold. The process goes like this: 1) call your banker and tell them you have closed 2) the bank will want to come and appraise the business assets and sell them 3) Once all business assets have been sold, you will be eligible to make an Offer In Compromise

If anyone wants advice on their situation, please contact me through my website.

Thursday, October 15, 2009 at 8:20 PM
Debt Helper says:

Forgot to mention my email address: JasonTees.com

Thursday, December 03, 2009 at 4:55 AM
Sean says:

Charles -

You are absolutely correct in everything you state - after the bank has exhausted all legal options in liquidating the business assets, the SBA will come looking for the personal guarantors to make good on any shortfall. However, the SBA is only allowed to collect the personal assets of the guarantors AS VALUED IN LIQUIDATION OR FORECLOSURE. This is a key point that the banks will not tell you. Liquidation value is typically far less than fair market value, and can make the difference between surviving a workout and getting crushed.

We do SBA workouts for small business owners every day - with tremendous success. We can frequently save the business assets as well as the personal assets.

Your emailer needs to keep talking to people until they find someone who understands how to do a SBA workout - it's not impossible.

Sean

Tuesday, January 05, 2010 at 3:47 AM
Don Todrin says:

Charles, Nice article. I add to it, we specialize in negotiating significant discounts of SBA guaranteed loans and have had great success in this area of debt workout. I invite your readers to look into our services, it can be done. Don Todrin. Second Wind Consultants.com

Thursday, January 21, 2010 at 3:45 AM
Don Todrin says:

Yes there is hope and help for working out defaulted SBA guaranteed loans. We at Second Wind Consultants.com have been doing this for 30 years extremely successfully, give our web site a look, there is much helpful information.