Starting a small business can be a dream come true, but it can also turn into a nightmare if the business falls on hard times. Unfortunately, as many as 80% of small businesses fail within the first 18 months, and by year 10, that number jumps to a staggering 96%. These businesses are not necessarily poorly run or operated by inexperienced entrepreneurs; often, they are simply victims of a weak local economy, uncontrollable circumstances, or too much competition in their area. As a result, many of these businesses accumulate debt that they are unable to repay, including SBA loans.
An SBA loan default can have devastating consequences for business owners who are already struggling to keep their business afloat. Business property and accounts can be seized, as well as personal property, leaving the borrower in a precarious financial situation. The borrower may also face wage garnishments, and any future loans from the SBA will be out of reach. Moreover, if the amount collected is insufficient, the U.S. Treasury can step in and collect through the Tax Offset Program, resulting in additional fees and interest charges being added to the debt, and any tax refunds being seized or garnished until the debt is repaid in full.
To mitigate the impact on the borrower, an SBA Offer in Compromise may be the solution. This option allows the borrower to satisfy their obligation without losing all of their property. However, it’s important to note that this method is only available if the borrower doesn’t have the means to repay the loan. To get approval for an offer in compromise, borrowers must be able to pay a lump sum or a repayment plan that won’t exceed five years.
At SolveDebt, we recommend that borrowers contact the SBA or an attorney before reaching the point of foreclosure on their SBA loan. The SBA’s collection methods are similar to other debts, and missed payments will typically result in collections calls and letters. If an SBA demand letter is received, it’s essential to respond to it correctly. We strongly advise contacting an attorney who is well-versed in this type of legal matter to avoid making mistakes that could have serious financial consequences. SBA collection processes can be aggressive, so it’s vital to take immediate action to reduce the potential impact.
Elements of a Successful SBA Offer in Compromise
Many small businesses rely on loans to get started or expand their operations. Financing is a critical part of turning a dream into a reality. Small businesses use loans for everything from working capital to purchasing equipment and marketing initiatives.
When businesses fall into hardship, it can be challenging to make payments on loans. While banks will often try to create work-out plans with struggling borrowers, this becomes trickier if the loan is guaranteed by the Small Business Administration.
If your loan falls into default, you can request an SBA offer in compromise (OIC). Getting approval for your OIC can mean the difference between being crushed by your SBA debt and being able to pay back a much smaller amount.
Defaulting on an SBA Loan
When you begin to fall behind on your loan payments, your lender will attempt to collect. This can include everything from repossessing the assets used as collateral on the loan to making a demand on the guarantors.
Any guarantors will have signed a guarantee document. The guarantee comprises a legal promise that you will personally pay back the loan if your business cannot. The SBA requires personal guarantees from any borrowers owning 20% or more of the business or those that have key management positions.
The SBA also holds a guarantee on the loan, but in a different way. The SBA’s guarantee says that in the event of default, if the bank fails to collect, the SBA will repay the bank up to 85% of the loan amount. As the lender begins its efforts to collect from the business, it will also turn to the guarantors and make demands. The bank will request that the SBA honor their guarantee once the lender exhausts all efforts to collect. If the federal government takes a loss, it may take additional steps, such as freezing the borrower’s bank account or garnishing wages.
Offer in Compromise vs. Collection
If you’re facing default on your SBA loan, an SBA Offer in Compromise can be your lifeline. This option allows you to settle your debt by paying a smaller portion of the full amount due, making it easier to satisfy your obligation without losing all of your property. However, not everyone is eligible for an offer in compromise.
To submit an SBA loan offer in compromise, you must meet certain requirements that the SBA has outlined. These include offering a reasonable amount compared to the net amount that can be recovered through collection efforts, making no fraud or misrepresentation, fully disclosing your financial capacity, ceasing all operations, liquidating all business collateral (assets), and securing the participating lender’s agreement with the offer being presented. Moreover, a value for any real estate mortgaged to the SBA must be evaluated and supported, and sources of funds for payment of the offer must be clearly identified.
Using an Attorney for Your SBA Offer in Compromise
Preparing an SBA Offer in Compromise can be a complex process that requires a deep understanding of the law and a high level of professionalism. Instead of attempting to do it yourself, we recommend using an experienced attorney. At SolveDebt, our team of SBA work-out attorneys can help you make a good faith settlement on your business debt and protect your rights throughout the process.
As you prepare your offer, you’ll need to get your financial disclosures ready. The SBA needs to understand your “full financial capacity,” which means you’ll need to have ready prior years’ tax returns, a personal financial statement with a list of your assets, as well as other forms that the SBA will require.
The most critical part of your OIC is your argument to the SBA that they should settle with you rather than pursue the full amount of the debt. There are several strategies that can result in the SBA accepting your OIC, such as demonstrating that it cannot recover the debt in a reasonable amount of time, raising questions about the SBA’s ability to prevail in court because of legal issues or factual disputes, or showing that your offer is better than what the federal government could otherwise obtain through home equity, wage garnishment, litigation, or other tactics.
Don’t wait until it’s too late to take action on your SBA loan default. Contact SolveDebt today to speak with one of our experienced SBA work-out attorneys and get the help you need to settle your debt and protect your business.