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What to do with a Bad SBA Loan - Part 3 - Dec 10, 2009

Posted by: David Alan Buslee in Articles

In part one of this series I reviewed what not to do when you are a troubled company and have an SBA loan. In part two, I discussed what the Lender and the SBA could do. Both times I stressed that you need to have a plan, based on facts, to decide your strategy and direction – BEFORE you bring an attorney into the mix.

A plan should cover four main areas.

Cash Flow – What are your real cash expenses? Can you eliminate some cash expenses – NOT payroll taxes or any other taxes! Having a sheriff lock your doors because your haven’t paid taxes will affect everything else you do. Document your assumptions….the lender will look at those first, before ever looking at the numbers. If you are going for a deferment, your numbers need to be rock solid. You can’t go to the well twice. If you can’t support a reasonable deferment, then you need to consider an Offer In Compromise. Your CFO should create and maintain the Cash Flow Forecasts.

Repayment – Have you been paying? Have you been paying what you could? When times were good, were you on time or did it take a phone call or dunning letter? Lenders want to help those who have honored their debt in the past.

Responsiveness – When lenders want data, they want it on time and accurate. In many banks, once the deadline for documentation passes, you will be automatically declined for a deferment, and be scheduled for liquidation. In other words, they will shut you down and sell your stuff. Your CFO should be able to provide everything on demand.

Collateral – Remember how I have repeated that you need to know the condition of your collateral? No estimates of inventory will work…accurate counts and values. Know what the liquidation value is of your equipment. Don’t depend on fixtures or leasehold improvements, they have no value to anyone but you. You need to know whether you assets can be sold to recover the value of the loan, and if not by how much will you miss it.

But wait – you guaranteed your loan…what will happen? Will they kick me out of my house?

There are really three options regarding your guarantee.

If you didn’t pledge your home against the guarantee, they will probably not act against your principle residence. The bank won’t benefit from obtaining a lien against the home – the guarantee from the SBA makes them whole. They certainly won’t if there isn’t enough equity in the home.

If you pledged your home, what is the loan to value? If there is enough equity to satisfy the loan, they probably will try to obtain a lien against the home. The SBA will sometimes entertain releasing a lien on your home as part of an Offer In Compromise. So in the case when you do have equity, you do need to come to the table with a strong offer to settle your debt. If there isn’t any equity, they probably won’t kick you out of your home. They want cash, not a home foreclosure – especially in this market. They may place a lien on the property, one that they can release if satisfactorily paid in an Offer In Compromise. The lien will sit there until you try to refinance your home or sell it.

The bottom line here is that before the bank goes after your home, you will have the opportunity to settle your debt via the Offer In Compromise process. You have some control over the situation. The best time to take control is…as soon as possible. Don’t hide from your lender. You need to face them so you can reach a mutually agreeable resolution, and ultimately keep your home out of harms way. And you need to do it with your CFO by your side.

Finally, please realize that this doesn’t mean that you will be blackballed from the SBA loan program. Losses and business closures happen all the time. If you want to be an entrepreneur in the future, though, you need to take care of the current note in a responsible fashion.