Across the country, many business owners are fighting not only to keep the doors to their businesses open, but to keep up with payments on their business debts. Falling behind on an SBA loan can be particularly scary because it may be one of the largest debts the business owes, and because these loans often involve personal guarantees and collateral.
Here’s what you need to know if you’ve taken out an SBA loan and can’t keep up with the payments.
Because SBA loans are guaranteed by the federal government, misconceptions about the collection process abound. “There are a lot of people who have this fantasy that the government is going to pay it so they can just try again next time, but that’s wrong,” warns Charles H. Green, director of the Small Business Finance Institute.
In most cases, if you fall behind, you’ll be working with the bank where you obtained the loan, and not the SBA itself. “The SBA will not come knocking on your door,” says Denise Beeson, a commercial loan officer at Baysierra Financial. Green agrees, adding that “The SBA used to do all liquidations, but that’s moved to preferred lenders. SBA is pretty much just in the business of doing accounting and letting the bank work it out.”
A personal guarantee is required on “the vast majority of SBA loans,” says Lendio president Levi King. “The only rare exception would be businesses with tons of collateral, lots of time in business, and super clean financials.” That means the lender may be able to look to the borrower’s personal assets, as well as business assets, to try to collect.
In addition, many borrowers pledge either personal or business property as collateral. If you pledged collateral for the loan “they may actually seize your collateral,” warns Beeson. Before the lender tries to do that, however, it may be willing to work something out. Green points out that the banks are often less interested in trying to repossess heavy or specialized equipment, which will then have to be disposed of in a timely fashion, than they are in trying to recover as much as possible of the defaulted loan.
Typically, the collection process begins as soon as you miss a payment, says Green. Once the loan becomes 60 – 120 days delinquent, collection efforts intensify. The lender may declare the loan in default and request the guarantee from the government, but it will still try to collect as much of the balance as possible.