If you don’t have all the funds to start your new business venture yourself, you may look into alternative ways of funding, including a US Small Business Administration loan, or an SBA loan.
An SBA is a type of federal loan that new businesses can use to start and grow their companies. But if times have been hard or you haven’t gotten the sales you originally expected, you might not be able to make payments on your SBA loan. Eventually, you could be in SBA loan default.
While defaulting on your loan can have a detrimental impact on your credit score, credit report and your chances of being able to borrow in the future, it can also mean the federal government can come after you to repay a debt. Here’s how to get SBA loan forgiveness and what to do if you’ve defaulted — or you’re close to defaulting — on your SBA loan.
How do SBA Loans Work?
There are a few different SBA loan options, with the most popular one being SBA 7(a) loans. You can borrow between $50,000 and $5 million. Depending on the nature of what you need a loan for, you could have the loan for up to 25 years.
The uses can vary depending on the loan you get and the reason you’re using it. You can use it to start your business capital, acquire another business, lease or buy real estate and buy equipment and supplies.
SBA Loan Forgiveness: Does the SBA Forgive Loans?
The SBA is not a lender. Instead, private lenders offer SBA loans that include guaranteed funding by the SBA. This means that if you are late making payments on your SBA loan, or you default on your loan, your lender will be the first one to attempt to collect your outstanding payments.
If you fail to repay your loan and end up in default, your lender will go to the SBA to collect your outstanding payment. The SBA and your lender might settle on a reduced amount, and when the SBA eventually comes to you for repayment, they might not require you to repay the full loan amount.
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The SBA and private lenders might offer SBA loan forgiveness through an offer in compromise. But this is only after your loan has defaulted, your lender has failed to collect a debt from you, and the SBA sends a demand letter. More on that later.
Who Handles SBA Loan Forgiveness?
There are a few options you’ll have when it comes to handling your loan if you start paying late, become delinquent or your loan goes into default.
The lender you took out an SBA loan with is where you’ll start when you think you’re going to have trouble repaying your loan. If you think you’ll end up being late on your payments, and eventually fall into delinquency, talk to your lender first. They might try to adjust your loan to lower payments, the interest rate or both. Depending on your situation, they might allow you to pay your loan a few weeks late with charging a late fee. You may also qualify for deferment.
If you still end up delinquent on your SBA loan, it’ll get reported to the major credit bureaus, which can cause your business credit score to plunge. Extreme lateness — usually up to 120 days late — means you’ve defaulted on your loan.
Consequences of Defaulting on an SBA Loan
You’ll have a harder time pleading your case to your lender when your loan has gone into default. At this point, your SBA lender will attempt to make you pay your loan in full, otherwise known as collections.
If your lender fails to get in touch with you and for you to repay your loan, they’ll go to SBA. Since SBA guarantees upwards of 85% of your loan amount, they’ll pay your lender and then come after you to pay back your loan.
When you get your SBA loan, you’ll sign a personal guarantee. That means that if you fail to repay your loan, your lender can liquidate your assets, garnish your wages and foreclose on your home if you used it as part of your guarantee.
The laws for collections vary by state and lender, so what you’ll end up paying might be different depending on where you live and your lender.
What Happens During the Repayment Agreement with SBA?
The most proactive thing you can do when you’re in financial trouble is to contact your lender as soon as possible. Working on a revised payment agreement could be the make-or-break line between you staying current on your loan and defaulting on it.
If you’ve gotten to the default stage and the SBA is contacting you about repaying your loan, they’ll send you a demand letter for payment and an offer in compromise, which you’re required to respond to within 60 days. An offer in compromise is a proposed settlement on your loan, offering you a reduced amount on your total loan owed. You’ll need to submit an offer in compromise to the SBA and provide evidence that you are unable to repay your loan.
The offer you submit must be something you can reasonably repay and usually as a lump sum. Both your lender and the SBA must agree to the offer in compromise. They could reject it, which means you’re still on the hook for your full loan amount.
While an offer in compromise would allow you to repay a reduced amount of your loan, you’re still required to pay a portion of it, regardless of its size. Because of this, you might still be on the hook for most of your loan. There’s a chance your offer in compromise could be rejected.
How Does the US Treasury Department Collect SBA Loan Debt?
If you don’t respond to your demand letter, the SBA sends your debt off to the U.S. Treasury Department for collections under the Treasury Offset Program.
If your debt goes to the Treasury Department, there are a number of ways they can collect your outstanding debt, including:
- Wage garnishment
- Social Security benefits garnishment (or other retirement benefits)
- Withholding federal income tax refunds
- Offsetting your bank account(s)
Since your loan belongs to the federal government, there’s no statute of limitations on how long your loan can be in collections and the government doesn’t need a judgment to institute garnishment. There’s a chance you could settle with the Treasury department, but it’s not likely. And if you do, it’ll be for much more than what the SBA would’ve settled for.
Nav’s Final Word: SBA Loan Forgiveness
If you have an SBA loan or you’re considering getting one, it’s important to know what could happen in case of an emergency.
Your best course of action is to act sooner rather than later. Contact your lender if you think you’ll be late on your loan payment. Contact them if you’re already a few days late or a few weeks late. Being proactive is important even if you think your time has passed. Work out a revised repayment plan — one you can afford — even if it’s temporary. Do your best to avoid having your loan go into default.
If it does go into default, you’ll have a harder time working with your lender on a revised payment plan. If you eventually get an offer in compromise from the SBA, make sure it’s a plan you can repay. This will be your only chance at SBA loan forgiveness. If your offer in compromise is rejected, you could face different levels of garnishment from the federal government for as long as it takes for you to repay your loan.
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This article was originally written on February 6, 2020 and updated on June 25, 2020.