Before you understand your SBA default consequences, you will need to know the bodies and organizations that are involved in the loan process. You might be thinking the loan you took belong to a private bank such as Chase or Wells Fargo. But the truth of the matter is your loan belongs to the Federal government.
The SBA is an agency that was formed by the Federal government to assist entrepreneurs to build businesses by getting access to lending. However, it is not the SBA that directly lends to the businesses. What the SBA does is guarantee a percentage of the loans to a bank to ensure there is less risk for the bank, and there are more incentives for the bank to use the program to lend further.
It means after defaulting on an SBA loan, it is not only the bank that will be pursuing you for the payment. It can get to a point where it will be the role of the Federal government to follow up on the loan. This will also mean that if you make any compromise for the repayment with the bank, this should also be approved by SBA too as it is their money that is used to guarantee the loans.
In the typical collection steps the lender ( who is the bank) will try to collect the debt through letters and phone calls informing the borrower about the default, and how this should be cured. Where the borrower doesn’t pay or even agree on an arrangement to pay, the lender will then move to the collection using their rights as per the SBA loan agreement. This can include forcing sales of some or all assets that were used by the borrower as collateral. This will, in most cases, involve all the assets of the business, and the home or other properties that are owned by the borrower.
A lender can cause your business to close as they can force an auction of your business assets. The lender may also choose to foreclose on the real property of the borrower. You can get to a point where the lender will have expended the available option for the recovery, and they will make a claim against the SBA guarantee to undertake the collection as their compensation for the defaulted loan. In most cases, the SBA guarantee around 85% of the loan if the loan amount is less than $150,000. Where the loan is above $150,000, they guarantee up to 75% of the loan.
When this happens, the SBA takes over the collection and servicing of the defaulted loan. The SBA will act by sending a 60 days demand letter where they will ask you to pay the deficit balance or even present the Offer in Compromise. An offer in Compromise refers to a process where the SBA does an evaluation of your income to see if they will accept the offer for the settlement of the balance owned. You are supposed to pay a lump sum of the amount in the offer.