Can small business loans be forgiven?

During the pandemic, Congress passed the CARES Act which included a unique COVID-19 relief program called the Paycheck Protection Program. It offered forgivable loans to small businesses that qualified. In the end, more than eleven million businesses were able to take advantage of PPP loan forgiveness. 

Other initiatives included the EIDL grant program that offered grants that did not have to be paid back, the Restaurant Revitalization Fund (RRF) that offered funds to help restaurants and other businesses keep their doors open, and the Shuttered Venue Operators Grant that offered grants to theaters and similar organizations. These funds also did not have to be paid back. 

If you’re a business owner struggling with debt, you may wonder whether other small business loans— besides PPP loans— can be forgiven, and if not, what happens if you can’t pay. 

Here we’ll explain what happens when you default on a business debt, when small business loans may be forgiven and your options if you need help with your small business debt.

Is There Any Difference Between Forgiving A Business Loan And Defaulting On One?

Outside of PPP loans, small business debt forgiveness isn’t a common practice. It does happen, but usually not until after the lender has made every effort to try to  collect on the debt. 

When you’re unable to pay a small business loan, the lender will typically go through various stages of the collection process. 

First you’ll get letters or phone calls from the lender trying to get you to make payments on the debt. It may turn the debt over to a collection agency.

Either way, the Fair Debt Collection Practices Act (FCRA), a federal law that restricts how debt collectors may collect consumer debts, doesn’t apply to business debts. That’s true of most state debt collection laws as well. That means you may get a lot of calls, letters or text messages, about the money your business owes. It’s even possible that debt collectors will contact others in an effort to try to collect.

The creditor may sue you and/or the business in order to get a judgment against the business. A money judgment gives them greater ability to collect from the assets of the business. 

If the business pledged property as collateral for the debt, the creditor may try to repossess or seize the property. Sometimes business owners don’t realize they have pledged property such as accounts receivables, and will be caught off guard by the actions of a creditor.  

It may be possible for the creditor to seize property like a business bank account without first taking the business to court.  

In the meantime, your delinquent loan payments may be reported to your business credit and/or personal credit reports, and hurt your credit scores. 

What Makes A Business Loan Eligible For Forgiveness?

Outside of the PPP loan program, which provided specific procedures to apply for and receive debt forgiveness, loan forgiveness usually isn’t a straightforward process. 

Instead a creditor will usually make attempts to collect, and if it can’t, may eventually decide to simply write off the debt—essentially forgive it without saying so. 

What makes a debt more likely to be forgiven? A lender may give up on trying to collect a debt if there is: 

1. No personal guarantee. That means the lender can’t try to collect from the debtor’s personal assets or income. 
2. No collateral. There is no collateral pledged for the debt. (When there is, the lender typically files a UCC lien. You can check your business credit to find out.)
3. Nothing substantial in the way of assets from which to collect, or there are too many other creditors that have priority interest in the assets of the business.

The size of the debt also matters. Smaller debts may simply not be worth it to pursue, though even small debts may be sold to collection agencies who may then try to collect. 

It’s rare for creditors to officially forgive a debt. More often, they eventually stop collecting. That leaves the business owner who defaulted unsure of what happens next. They may think “no news is good news,” but they may also wonder when and if they may hear from a debt collector in the future. 

Note that the large majority of small business credit cards carry a personal guarantee which means the lender may try to collect from the cardholder and not just the business. 

What Happens If I Default on an SBA Loan?

Except for Paycheck Protection Program loans made during the pandemic, SBA loans must be repaid. There is no forgiveness program for other types of existing SBA loans, including Economic Injury Disaster Loans (EIDL), 7(a), microloans, or other types of SBA loans. 

With the exception of Disaster Assistance loans, SBA loans are typically not made by the U.S. Small Business Administration. Instead they are made by financial institutions and the SBA guarantees them. The SBA guaranty is designed to protect the lender not the borrower. If you do not pay back another type of SBA loan, the lender will try to collect from you. If they are unsuccessful, you may be subject to other collection actions.

Most SBA loans require an unlimited personal guarantee from anyone who owns at least 20% of the business. And since these loans are federally guaranteed debts, the US Treasury Department may have collection options that other lenders don’t, including intercepting tax refunds or garnishing wages. 

Small business owners may be able to settle an SBA loan through an Offer in Compromise that allows you to pay less than the full amount owed. 

How Do Other Business Loans Process Loan Forgiveness?

Again, business loans generally do not have a formal forgiveness process, and lenders are reluctant to completely forgive loans unless they have determined the borrower can’t and won’t pay back the loan. Instead they may offer debt relief programs that restructure debt. (Keep in mind that restructuring debt may affect your ability to get business loans in the future.) 

If you are worried about paying back your business debts, consider the following steps:

• Go to SBA.gov to find help from SBA resource partners like SCORE or your SBDC. They offer free consulting and educational programs and may be able to help you find ways to reduce operating expenses and increase revenues. 
• Explore whether your business is eligible for the Employee Retention Credit (ERC), a refundable payroll tax credit that was also designed to help businesses through the coronavirus crisis. It may provide additional funds to help your business manage its debts. You can learn about eligibility at the IRS website. 
• Find out whether you are a candidate for business debt consolidation. Keep in mind that debt consolidation loans may result in higher interest rates, depending on the type of loan you get. 
• Monitor your personal and business credit  to determine whether these accounts have reported late payments or negative information, and to check your credit scores. 
• Talk with your lenders to find out whether you can restructure your debt. 
• If all else fails, get legal advice to find out what lenders can and cannot do if you are unable to repay the debt.