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What to do with a Bad SBA Loan - Part 2 - Dec 10, 2009

Posted by: David Alan Buslee in Articles

In part one of this series, we discussed about the need to approach the Lender with a plan and alternatives. You and your CFO should have pulled together an analysis regarding the collateral condition, cash flow forecasts and debt capacity, and an analysis regarding guarantees.

Why is a plan so important? You, as the Borrower, need to direct him to the best possible alternative and provide him with the support for the decision. A Lender’s powers are clearly defined in the loan documentation.

A Lender’s general powers typically are, without notice and without the borrowers consent:

A. Bid on or buy the Collateral at its sale or the sale of another lien holder, at any price it chooses;
B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payment for property taxes, prior liens, insurance, appraisals, environment remediation costs, and reasonable attorney's fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;
C. Release anyone obligated to pay this Note;
D. Compromise, release, renew, extend or substitute any of the Collateral; and
E. Take any action necessary to protect the Collateral or collect amounts owing on this note.

In addition, there is a paragraph from the Debt Collection Act of 1982 and Deficit Reduction Act of 1984. It states:

"These laws require SBA to aggressively collect any loan payments which become delinquent. SBA must obtain your taxpayer identification number when you apply for a loan. If you receive a loan, and do not make payments as they come due, SBA may take one or more of the following actions: -Report the status of your loan(s) to credit bureaus
-Hire a collection agency to collect your loan
-Offset your income tax refund or other amounts due to you from the federal government
-Suspend or debar you or your company from doing business with the federal government
-Refer your loan to the Department of Justice or other attorneys for litigation
-Foreclose on collateral or take other action permitted in the loan instruments."

What can the SBA do?

1. Deferment – This means deferring some or all of your normal payment. Your cash flow needs to indicate that you can cover ongoing operational costs, but not the debt service on the obligations. As one writer has described it, cash needs to be “juuuuuuusst right”.

2. Offer in Compromise – If your cash flow is not sufficient to cover ongoing operational costs, winding down the operation quickly to preserve collateral may be the best option. This is an emotionally difficult decision. Banks, if they cannot do a deferment, will want you to present a plan for orderly liquidation of the company. It is important to know the liquidation value of the collateral – typically called the “Quick Sale” valuation. Equipment brokers and distributors are your best bet for such a valuation. Your offer, then, is an offer to pay any shortfall against the debt.

3. Foreclosure – an involuntary liquidation of the business.

It’s easy to imagine how you can make a mistake, this is why you need a good CFO to help guide you through the maze of consequences. Do you know what to do when the sheriff seizes your equipment for the leasing company, or you can’t make a rent payment, or the IRS padlocks the door for past payroll taxes or if you are out of cash and the “Big Check” is lost in the mail? The list could be much longer. You can’t imagine all the problems for which you don’t have an answer. If and when you decide wrong, you could be shutting your doors prematurely and paying your creditors out of your own pocket.

Remember when you were in school. Leading a troubled business is like having a pop quiz the day after you were sick. It’s not your fault you missed yesterday’s lesson, but now you must have the right answers or you’ll fail. With the right B2BCFO on board, it’s like sitting next to the brightest kid in the class with permission to copy his answers. In Part 3, I will talk more about the elements of a plan and some of the strategy you and your CFO need to consider.