There is this urban lore that I frequently hear that states that SBA loans cannot be worked out, paid off short with a compromised conclusion and with forgiveness of the shortfall. 

It ain’t so. It can be done.

It is difficult, as with any workout negotiation, and one must have a clear undrstanding of the SBA’s rules and requirments, however it can be done successfully if the situation is handled correctly and the timing is correct.

In fact the SBA (Small Business Administration) has its own offer in settlement forms, a committee which accepts and rejects and it is even willing to indirectly,  through your corresponding banker, negotiate a fair resolution for a defaulted loan. Thats both good and bad as its both the bank and the SBA that must be satisfied and each has its own rules and requirements.

The SBA does however have some strong requirements that are fast and hard and must be understood to avoid wasting time and being frustrated.

1.  The SBA requires that the breaching business no longer be operational when an offer is made. This is also an important part of the strategy and must be evaluated very carefully as to how this is handled in order to serve your own best interest. This is not cut and dry but subject to many options.

2. All the business assets must be liquidated, and this is an important part of a workout plan, which must be handled effectively and can be accompished in your own best interests.

3. A significant legal effort to recapture any potential cash must have been implemented before an offer will be contemplated. There is some flexibility here, but not much.

4. All the guarantors, including your spouse if he/she signed the guarantees  must deal with this issues effectively and completely. If not a spouse, then  each guarantor sinks or swims on their own merits. If the debt is guaranteed by both spouse, there are greater difficulties  which must be worked out effectively and can be.

Each guarantor must file his or her own offer in compromise and create their own negotiation settlement.

Frequently this also becomes a source for negotiation as we want to resolve all the issues in one global resolution for all parties involved. This may can be a challenge.

Keeping in mind, that the bank actually lent you the money, the SBA merely guaranteed the payback up to 80%, but since the SBA will pay the bank, they require the bank, as its agent, to exercise all due diligence to collect as much as possible or the bank may potentially violate the terms of the guaranty and lose the payback guaranty opportunity. This is the source and reason for a tough bank collection practice and attitude.

Your lending bankers support and cooperation is important in developing a successful workout, and without a good banker relationship a good workout conclusion is diminished although achievable.

The overall principles remain the same, maximum collection under the financial circumstances of the borrowers situation.

It takes time,  as the review committee is in Virginia, and services the entire country. It is a political beast and over the years, depending on various political issues, they can be easier or harder to workout loan shortfalls.

At the moment I believe they are suffering many losses thus they want to stem the flow of loss, but their mission is to support the system and the borrowers so the results are mixed, mostly depending upon the quality of the preparation and presentation, tough but fair I would say.

The SBA is very busy and reviews files in the order they are received. They typically ask for additional information, once under review, to better understand the financial condition of the guarantors and thus it can be an extremely long procedure, which can take many months, even years. 

Once reviewed, negotiated to conclusion and accepted, I have had great success in modifying the acceptance further, the “second wave” negotiation I call it,  adjusting the terms and conditions and even lowering the payoffs further then agreed, based on the realities of the refinancing or source of funds requirements (lenders requirements if you are refinancing to support the workout).

This second pass is very important and can yield extraordinary results.

My best advice is to protect yourself as best you can with effective financial planning before the notes are called and before the business closes and the assets are liquidated. You want to be in control of this process and in the end it will work out best for you. A pro-active strategy is what works best.

You know were you are headed before anyone else, thus pre-emptive planning is critical for the best outcome for the borrower. 

Hire someone experienced and therefore knowledgeable regarding the practices of the SBA and such workout scenerios and it will all work out.

Additionaly, there are sometimes serious potential tax consequences regarding workouts and forgiveness of debt which can be quite devestating and must be considered throughout the workout negotiation, or one runs the risk of solving one problem while creating another almost as large. Remember debt forgiveness is convereted to ordinary income for IRS purposes and income calculations. There are strategies around this as well.

I would be delighted to review your case and without obligation make recommendations.

Call me  413-687-8388, we can discuss your specific circumstances and design an effective strategy that will yield the best results.

I await your call.