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NJ small business, small business loan

What Happens If I Can't Pay Back My Small Business Loan?

On Behalf of Veitengruber Law | Jun 21,2021

An average of 1 in 6 Small Business Administration loans are not paid back, with the average of these loans taking five years to go into default. So, if you are a small business owner falling behind on your SBA loan payments, you are not alone. Given the unexpected hardships of the last year and a half, this is likely to be a growing group. If you are at risk of defaulting on an SBA loan, here is what you can expect and some potential solutions.

1.    Is my SBA loan in trouble?

When you get an SBA loan, you are not borrowing directly from the SBA, but a lender who offers an SBA loan. If you think your loan is in trouble (or could be soon), you will be dealing directly with the originator of the loan. Most lenders will allow a 10-day grace period after a missed payment before they will begin efforts to collect a late fee and take next steps. For most lenders, these next steps will be contacting the borrower to determine a new repayment plan. A revised repayment plan might look like a full restructuring of the loan or interest-free payments for a pre-determined amount of time. These plans would bring your loan out of default.

2.   I am current on payments, so why am I in default?

Even if you are current on payments and make every payment on time, you could be in default for other reasons. This can happen if a borrower (intentionally or unintentionally) violates the terms of the loan. This can mean you forgot to supply tax returns to the lender, took on additional debt without notifying the lender, or neglected to get lender approval prior to bringing on new shareholders.

3.   How will the lender collect on the loan?

If your efforts to repay your loan fail and your loan does go into default, the lender will attempt to collect the full amount of the loan from the small business owner first before turning to the SBA. The SBA guarantees repayment of loans up to 85%, but lenders will only take this route if all other options fail. First, they will attempt to collect any assets put up as collateral for the loan. If you own more than 20% of the business, you could be required to sign a personal guarantee that the loan will be repaid. This would allow the lender to come after your personal assets in the event the business itself cannot pay back the loan in full. If all else fails, the lender will go to SBA for repayment of the loan. When this happens, the federal government can collect on the loss through wage garnishment or freezing the owner's bank accounts.

4.   What can I do if I'm struggling?

The best thing to do if you are worried about defaulting on your SBA loan is to get in contact with the lender to work out a new repayment plan. Being proactive about contacting the lender can ensure you stay out of hot water. In the meantime, take another look at your business and determine the best steps going forward. This could mean increasing sales, decreasing staffing costs, selling property or equipment, or even selling the business altogether.

For many small business owners, their business is more than just a way to make money—it's their dream. It can be difficult to approach this situation with a realistic view, but it is important to consider all your options. For help determining the best plan for you and your business, reach out to Veitengruber Law ASAP.

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