A small business owner may be passionate and committed to their ideas, but things donât always go according to plan. If you lack funds or are worried about making payments for your SBA loan, it may be time to start learning about delinquency and defaulting on loans.
From Delinquent To Default
A loan will go into default when a borrower repeatedly fails to meet the legal conditions of the loan. Before you default on a loan, chances are the loan will first be deemed delinquent. Although they arenât exactly the same problem, both loan delinquency and default can do serious damage to your credit score. A loan becomes delinquent as soon as you have missed or are late making a payment, even if only by one day. If your loan becomes delinquent, your lender may charge you late fees or increase your interest rate. If you donât take care of a delinquent loan quickly, it can easily lead to a default.
When Is My SBA Loan In Default?
Depending on the specifics of your loan agreement, a delinquent loan will fall into default status after a certain amount of time has passed and no action has been taken on the outstanding balance. Lenders will usually wait anywhere from 90–120 days before considering a delinquent loan to be in default.
Tips To Avoid Defaulting On Your Loan
Communicate With Your Lender
If youâre struggling to make payments on your loan, you should first contact your lender to discuss your position. This is always preferable to waiting until the problem worsens. You may find a better way to fix your temporary financial issues by speaking with your lender transparently, rather than waiting for the loan to default.
Create A Modified Repayment Plan
If you communicate honestly with your lender, they may be open to helping you create a more feasible payment plan or reducing the overall cost of your loan. SBA partner lenders are almost always willing to work with borrowersÂ since they lose money when they have to chase down someone in SBA loan default. You can expect any proposed repayment plan to be largely in favor of the lender, but it will most likely be a better option than defaulting.
What Happens If You Default On An SBA Loan
Seizure Of Collateral & SBA Guarantee
If no alternative options are possible, or you have no ability to make payments, your lender may force you to default on the loan. They will then begin standard loan collection procedures, as outlined on your SBA loan agreement.
First, your lender will contact you via phone and email. You should know that FTC guidelines that restrict how often, when, and how collectors may contact you donât apply to business loans, so any restrictions on this communication will depend on which state your business operates.
The bank will then be able to seize any collateral you put up on the loan, first business assets and then personal, per your agreement. If your business has failed and there are no remaining assets to fulfill repayment, your personal guarantee will be invoked. Alternatively, they may force you to sell your assets, or obtain a court order demanding any money in your business accounts.
If the loan is still not repaid in full, the lender will then file with the SBA for the guaranteed portion of the loan, minus any amount they were able to collect through alternative means.
Transfer To The Treasury Department
Although the loan will have been fully paid back to the lender at this point, the process is unfortunately not over. The SBA will then contact you for repayment of the funds they gave to the bank as part of your SBA loan agreement. This communication will come in the form of a 60-day demand letter.
This letter states that your case has been transferred to the Treasury Department, which will demand you either settle the debt, or provide an âoffer in compromise.â The Treasury Department has the ability to garnish wages, withhold future tax refunds, or file suit against you in a civil court. They will collect the debt by any means necessary if you have not resolved by the given deadline. While it is still possible to settle with the SBA at this point, it is much more difficult.
An âoffer in compromiseâ is a proposed payment plan (or smaller lump sum) than what is being demanded by the Treasury Department. It is only a viable option if your business has completely ceased all operations and been liquidated. This compromise will open a dialogue and allow the Treasury to determine your ability for repayment.
When creating an appeal, you will need documentation of tax returns, business and personal assets, income statements, expense reports, and more. These documents should serve as proof that you cannot repay the borrowed funds to the SBA in a reasonable time period, and show you are in need of a more lenient payment option. If your argument is convincing, the Treasury will opt to work on an offer in compromise so they can recover some of the funds lost on your case.
Above all else, remember that defaulting on an SBA loan is serious, but it is not the end of the world. Although it can be a stressful time, it is possible to recover after youâve settled the debt. Do what you can to avoid defaulting, but if you must, just keep moving forward, and keep improving your financial health!
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