What Happens If You Default on an SBA Loan?

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Skip Team

July 11, 2023 • 3 min read


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Understanding the consequences of failing to repay an SBA (Small Business Administration) loan is essential for borrowers. Depending on the specific loan program and terms, there are various potential outcomes. This post will talk about some of the consequences, especially for the COVID EIDL loan program, that has 4 million borrowers with defaults starting to happen.

Disclaimer: This is for informational purposes only and is not legal, accounting, or otherwise professional advice. Seek legal advice or contact the SBA directly to work out your specific situation.

SBA EIDL Loan Default — What Happens?

Late fees and penalties are common consequences of missed or late payments SBA loan payments. The SBA can impose these charges, increasing the total amount owed and making it more difficult to catch up on payments.

Defaulting on an SBA loan can have a significant negative impact on your credit score. While the SBA itself generally doesn't report to credit bureaus, if a third-party lender provided the SBA loan and it was personally guaranteed, they may report the default. This can make it challenging to obtain credit in the future, both personally and for your business. A lower credit score may result in higher interest rates or even loan application rejections.

When borrowers default, the SBA or its authorized representatives can initiate collection efforts to recover the outstanding debt. These efforts can include direct contact, sending collection notices, or engaging collection agencies. Collection attempts can persist, causing stress and inconvenience.

📌 Related Post: Can't make EIDL payments? Here's what you can do.

In cases where other collection methods fail, the SBA may resort to legal action. They can file a lawsuit to obtain a judgment for the unpaid loan amount. If successful, they may garnish wages, place liens on property, or seize other assets to recover the debt. Legal action is costly and can lead to additional expenses for legal fees and court costs.

Providing collateral to secure an SBA loan comes with the risk of losing it. If you default, the SBA may seize and sell the collateral to recover the outstanding balance. Losing collateral can have a significant impact on your business operations or personal assets.

Defaulting on an SBA loan can result in being blacklisted from obtaining government-backed loans in the future. This limitation applies to loans for various purposes, such as starting a business or purchasing a house. Being blacklisted restricts access to affordable financing and necessitates seeking alternative funding sources.

SBA Loan Defaults — How Does The Process Typically Start?

If default occurs, the SBA typically initiates collection efforts after 3-6 months by sending a 60-day demand letter. This letter offers an opportunity to repay the loan or submit an offer in compromise. An offer in compromise allows you to settle the debt through a lump sum payment or a payment plan. Approval of an offer in compromise depends on proving inability to repay within a reasonable timeframe and may require shutting down business operations and liquidating assets.

Ignoring the 60-day demand letter or failing to reach a compromise with the SBA may result in the transfer of your loan account to the U.S. Treasury Department. The Treasury Department employs various methods to collect the debt, such as targeting government benefits, tax refunds, and wage garnishments. Legal action may also be pursued.

Promptly addressing difficulties in loan repayment is crucial. If you encounter challenges, it's essential to contact the SBA or your loan servicer to explore potential options, such as loan modification, deferment, or repayment plans based on your financial situation. Seeking advice from a business attorney experienced in SBA loan issues can provide valuable guidance and assistance throughout the process.

Getting SBA Loan or Funding Help

Do you need help navigating existing or new funding for your business? Skip can help you with SBA loans, grants, or other business financing options, including helping you navigate how to lower SBA loan payments temporarily. Get ongoing personalized help from our team. Join Skip today and get 1-1 support for your business.

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