When I speak with SBA borrowers who have defaulted on their loans, they often try to figure out how their banker will view their situation in order to devise a settlement strategy. In some cases they are right, and in some cases they are quite wrong. Here are some examples:
Client: Threatening bankruptcy will convince them to take my offer.
Your Banker Thinks: The threat of bankruptcy is not a great point of leverage for you. If you file for chapter 7 BK, you are making my life easier because I now have one less file to deal with. Some bankers even have the audacity to tell borrowers to go file for BK (which they should never do due to the potential liability of having that be construed as legal advice).
Client: I have a partner, so all I want is the banker to let me pay for my half of the loan.
Your Banker Thinks: Unless you have a LIMITED personal guarantee (Note: 99% of personal guarantees are UNLIMITED), all guarantors are responsible for 100% of the debt. This means that if your partner has $0, and you have $100,000, the bank and the SBA will expect you to kick in more than your partner regardless of ownership percentages.
Client: I can’t afford my loan payment because I have too many personal expenses.
Your Banker Thinks: Don’t ask me to finance your lifestyle. If you have boat payment, a really nice house, and eat out 3 times a week, you need to scale back your spending. Asking the bank for a loan modification should not be your first option when times are tight. I want to see that you’ve pursued other avenues to manage your cash flow more efficiently – both within your business and in your personal life.
Client: I’m going to sell my business to someone, settle my personal guarantee, then buy the business back later.
Your Banker: Go for it. Just remember, if I catch you intentionally misleading me, I’m going to refer the matter to the SBA Inspector General, who is responsible for investigating fraud. I expect full disclosure in our dealings. If there is a question about whether your plan is “above board” just ask me.
