Can an SBA Loan Qualify for Forgiveness?
Business owners looking for extra help or resources will often turn to the United States Small Business Administration. This government agency acts as a resource for small business owners at various stages of growth. One of the more popular resources this agency offers is the Small Business Administration (SBA) Loan Program.
The Small Business Administration Loan Program offers a few different types of loans that are designed to give small businesses their start. The loans are granted under the condition that the person taking them out (the guarantor) promises to pay them back.
Like any other type of loan, repayment can quickly become overwhelming — regardless of the success of your business. With all the talk around student loan forgiveness, individuals who took out an SBA loan may wonder if there are any forgiveness options for them.
Types of SBA Loans
The U.S. Small Business Administration has four different types of loan programs: microloans, 7(a) loan program, the 504 loan program, and disaster loans.
Microloans
Microloans go up to $50,000, with averages being much lower. These loans are issued by a nonprofit intermediary and the interest rate can be as low as 8% or 13%. These loans are normally used for buying equipment or other costs associated with starting your business.
7(a) and 504 Loans
The 7(a) loan and the 504 loan both go up to $5 million. It’s common for business owners to apply for these loans when starting their business if they suspect costs will go above $50,000. However, business owners can apply for these loans at any time. While the 7(a) and 504 loans have a lot of similarities, these loans are used for different things and are issued by different entities.
The 7(a) loan is used for purchasing more expensive equipment and business expansion, with the loan being processed by a credit union or bank. The 504 loan is meant to buy facilities, land, and machinery. Unlike the 7(a) loan, a 504 loan will be processed by nonprofits or private-sector lenders.
Disaster Loans
Disaster loans go up to $2 million and are issued by the U.S. Small Business Administration. These loans are only available to a small business that has gone through some type of emergency or natural disaster, like a fire or tornado.
Each loan will have its own set of qualifiers the business owner (also known as the guarantor) and their business will have to meet. Some SBA Loans require your business to be under a certain net worth or size. Of all these loans, the 7(a) and 504 loans are still the most popular.
Applying and Qualifying for an SBA Loan
The first step in applying for an SBA loan is finding a good lender. Many credit unions, banks, and nonprofits work with the U.S. Small Business Administration to issue loans to small business owners.
It usually takes time to find a lender that suits you. Different lenders may have different terms and conditions or have different interest rates based on your credit. After you’ve settled on a lender, you’ll need to make sure you qualify.
SBA loans require that all applicants provide a personal guarantee. This is the promise that the business owner will pay back the loan if the business fails. Depending on the type of loan you’re going for, there may be a cap on how much you must pay back on the loan. Or, the loan could require you to give an unlimited personal guarantee, which is where you are required to pay back the full amount.
If you cannot make that personal guarantee, you may be able to provide collateral. This is when you pledge another asset you own (a house, a car, etc.) that the bank will take if you cannot provide the loan. Some SBA loans require both a personal guarantee and collateral. This can add another level of stress if you cannot make payments on the loan.
What Happens If I Miss a Loan Payment?
If you miss a loan payment, the lender may reach out to you directly after around 10 days. They will most likely charge a late fee. The lender will try to collect from the borrower directly before reaching out to the U.S. Small Business Administration or putting the loans in default.
You may be able to work out a deal with the lender, such as having a late fee waived or making interest-only payments. Some small business owners may look into refinancing their loans, but that might result in a new, higher interest rate.
Can You Default on an SBA Loan?
Missing too many payments will result in defaulting on the loan. If you break the terms and conditions of the SBA loan, it will also result in defaulting on that loan.
Breaking the Terms and Conditions
The terms and conditions of your SBA loan depend on the lender and the specific loan you applied for. Most SBA lenders require that the business owners get their permission before taking on new shareholders, as shareholders would cut into the profits the lenders can receive if the business goes under. The business owner should avoid taking on new debt as well.
In addition, most SBA loans require business owners to provide yearly tax returns to the lender for the life of the loan. This is so the lender and the U.S. Small Business Administration can check on the financial health of your business. Failing to provide yearly tax returns can result in defaulting.
Missing Payments
The business owner made a personal guarantee to pay back the loan. This means if you’ve missed to many payments in a row, the lender has the right to seize assets or garnish wages as a way to collect on the debt. They can also take any assets you put up as collateral in order to bring the debt down as well.
Can You Apply for Loan Forgiveness?
Only businesses that have defaulted on their loans can apply for SBA loan forgiveness. Once you’ve defaulted on the loan, you can reach out to the U.S. Small Business Administration to ask about forgiveness. Your lender may reach out to the SBA as well to inform them that you’ve defaulted.
After a lot of consideration, the U.S. Small Business Administration may purchase anywhere from 50% to 85% of the remaining loan balance back from the lender. That doesn’t mean the guarantor doesn’t owe anything though. They will be responsible for paying back the SBA.
The U.S. Small Business Administration will guide you through liquidating assets and potentially the business as a whole to make debt payments. After it becomes clear the guarantor has no more assets that can be sold in order to pay off the debt, the SBA will allow the guarantor to issue an offer in compromise.
The SBA only does this after the business owner has given financial statements to prove the business is in liquidation and cannot support the loan payments. In other words, your business has to completely shut down in order to qualify for an offer in compromise.
Offer in Compromise
After they’ve been approved to give an offer in compromise, the business owner will write back a number they’re able to pay on the loan. It’s unlikely that the SBA will forgive 100% of the loan. They will instead try to settle on a number that makes the most sense for them and the business owner.
The SBA will consider if you have any additional assets, like extra cars or any collectibles, before they accept your offer in compromise. They’ll also consider your future earning potential, and how likely you are to stay afloat with a higher payment.
If they accept the offer, the SBA will collect the payment and the debt will be marked as closed. However, the SBA can also reject the offer in compromise. From there, they can collect on the loan in a few different ways.
If the Offer in Compromise Is Rejected
The U.S. Small Business Administration could use the Treasury Offset Program to collect the debt through the business owner’s income tax refunds. The other way is through cross-servicing.
Cross-servicing is where the SBA sends the loans to the U.S. Department of Treasury’s Bureau of the Fiscal Service. From there, they may collect the debt by hiring a private debt collector, alerting major credit reporting bureaus, garnishing wages, or opening a case with the Department of Justice.
Things to Keep in Mind
It’s in your best interest to negotiate with your lender before defaulting on your loans. Even if you’re certain you will need to pursue SBA loan forgiveness, you cannot reach out to the U.S. Small Business Administration yourself.
Negative Effects of Loan Forgiveness
If you have to apply for SBA loan forgiveness and default on those loans, you’re also required to dissolve the business entirely and sell any related assets. All the money you earn back will go toward the debt you owe.
Asking for SBA loan forgiveness will make it harder for you to open a business or apply for any other federal-based loans in the future. It can also have negative impacts on your personal lines of credit.
Getting Help for Loan Payments or Loan Forgiveness
It’s important to get support if you feel like you may have to apply for SBA loan forgiveness. American Business Credit can help guide you through the loan negotiation process and offer alternatives to applying for SBA loans if you don’t think it’s worth the risk.
