Assistance from the Small Business Administration (SBA) has been essential for many small businesses, especially in the time of COVID. One of the main types of support that the SBA provides is financial, in the form of loans to small businesses. 

During non-emergent times, getting an SBA loan can be difficult. They have strict requirements about the types of businesses they will lend to, and require extensive documentation. The COVID-19 pandemic has loosened some of these restrictions, as the SBA administers the Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP) loans. The need to quickly get funds to businesses has prompted the SBA to significantly simplify the application processes, making SBA loans much more common.

Of course, during the time of COVID-driven economic uncertainty, many small businesses are struggling. This can lead to more entrepreneurs not being able to repay their SBA loans and defaulting on them. We’ll answer your questions about what that means, the impact it could have, and what you can do about it.

Have I Defaulted On My SBA Loan?

One of the first things to understand is whether you’ve actually “Defaulted” on your SBA loan, or whether you’re simply “Delinquent.” These two statuses mean very different things, and your next steps depend on which one applies to you.

• “Delinquent” means you’re behind on your SBA loan repayments, but your lender still believes you will be able to repay some, or all, of the loan amount
• If a lender determines your small business will be unable to repay your loan, then they may decide you have “Defaulted” on it.

There are different considerations and courses of action for each designation.

Who Decides if I Have Defaulted or if I Am Delinquent on My SBA Loan?

In some cases, the SBA will lend money to a small business directly, in which case they will decide when you’re delinquent and when you’re in default. Most of the time, though, they provide loans through partner banks and financial institutions—typically, they will “guarantee” the loans for a lender and reduce their risk.

In those cases, it will be the lender, probably your bank, that will determine if you’re delinquent or in default.

How Do I Deal with a Delinquent SBA Loan?

A delinquent SBA loan is simply one where you’re behind on your loan repayments. Your lender or the SBA will write to you to let you know that you are delinquent, and to insist you make repayments as soon as possible. Although the course of action will vary by lender, here’s what you can generally expect:

• The lender will assess a late fee for failure to pay.
• They will contact you to arrange for repayment.
• You can explain if you are having difficulties repaying.
• They may restructure the terms of your loan or look for another solution.

In many cases, it makes sense for you to contact your lender as soon as you think you might miss a payment. The sooner you ask for help, the more flexible your lender could be.

What Type of Solutions Might I Have for Repaying a Delinquent SBA Loan?

Ultimately, the lender wants you to repay what you owe. This means they might be flexible in allowing you to repay. This might include:

• Restructuring your loan over a longer length of time to reduce monthly repayments.
• Advising you to review your cashflow and expenses to free up more money for repayments.
• Allowing you to repay only the interest portion of your loan while you reevaluate your small business finances.

A lender will generally want to see a payment of some kind within 30 days of contacting you, so always try to make at least some payment.

What is the Impact of Not Making Repayments Quickly Enough on a Delinquent Loan?

The speed with which you make repayments, or whether you make repayments at all, will determine the likely impact of a delinquent loan.

• Not making a payment on schedule may result in the loan being marked as “late” on your business or personal credit report.
• Repeatedly missing loan repayments will result in more derogatory marks on your credit report.
• Failing to repay your loan for a period of time (typically 90–120 days) will result in your loan going into default.

Any derogatory marks on your business or personal credit report will lower your credit score and may impact your ability to get financing in the future.

What Happens If I Default On My SBA Loan?

If you repeatedly fail to make repayments and cannot reach an agreeable plan with your bank or the SBA, then your loan will go into default. This will likely result in the following:

1. Your collateral is at risk: When you originally applied for your loan, you may have needed to offer business or personal assets to secure the loan. When your loan goes into default, the lender has the right to seize and sell those assets to get some or all of their money back.
2. Others’ collateral may be at risk: If other people signed a guarantee on the loan, then their assets are also at risk of being seized and sold.
3. The SBA will demand repayment: The SBA will become involved in asking for repayments (if they were not already) and will issue a demand letter.
4. The SBA or your lender will take legal action: If you are not able to repay any money within a certain amount of time, the SBA will go through your business (and possibly your personal) finances. If they can identify money that can be used to repay the loan, they may start legal proceedings.
5. Your credit score will be impacted: Your business and personal credit reports will show that your loan has gone into default.

What Type of Solutions Might I Have for a Defaulted SBA Loan?

If you are in default, you still have a few options:

1. Offer to pay at least some money towards settling the loan as this shows goodwill.
2. Be prepared for legal action and for the SBA to garnish your business earnings to repay the loan.
3. If you genuinely cannot repay the full value of the loan, you can fill out an “Offer in Compromise” form and send it to an SBA Loan Officer. These forms will require in-depth information on your finances and will set some amount that you are able to repay. 
4. Send the Offer in Compromise to your lender and the SBA. If it is accepted, they will set a date for you to make final payment, and the loan will be closed.

Do You Have Any Advice for Reducing the Possibility of Becoming Delinquent or Defaulting on an SBA Loan?

Yes, here are some starting points:

• Get on top of your cash flow and start to build an emergency budget.
• Prioritize your SBA loan repayments over other types of less important expenses.
• Reduce the money you are taking out of the business to free up funds for repayments.
• Reduce your fixed and variable business expenses as much as possible.
• If you don’t think you’ll be able to make repayments, contact your lender and the SBA as soon as possible.
• Keep rigorous details for both your business and personal finances.
• Look at consolidating existing business loans under better terms to free up money for repayment of the SBA loan.
• Speak to an accountant or business attorney to understand your options and what you can do financially to stay on top of repayments.

We understand that things are difficult for small businesses right now, and hope this helps you deal with a delinquent or defaulted SBA loan.