Quite often, I hear from distressed borrowers who want to settle their debt. In some cases settling is possible, in some cases its not. The purpose of this article is to explain three key elements that must be present in order for a business to have a chance to settle their SBA debt. Please keep I mind that this is NOT an exhaustive list.
1) The business must have ceased operations (Note: some exceptions do apply!). This means that you’ve closed your doors for good, or you have sold the business to a non-affiliated third party. The reason that the SBA wants the business to have ceased operations is to ensure borrowers don’t continue to benefit financially after the SBA and the lender have taken a loss.
An OIC will be considered if a business is sold as a “going concern” to a non-affiliated third party. The reason the buyer needs to be a non-affiliated third party is to ensure that business was simply sold to make the borrower eligible for a debt settlement, only to have the borrower re-purchase the business at a later date.
2) All business assets must be liquidated. This element applies to situations where the business has closed for good. The SBA wants all assets to be liquidated and applied to the loan balance BEFORE any OIC discussions begin. That way, they know how much is owed after all possible business collateral has been liquidated. (Note: Many borrowers want to purchase their own assets from the bank. Typically, the bank will not allow this, as it would basically mean that the borrower could remain in business, which as we learned above, is not something the SBA will entertain.)
3) You must have access to cash. You’d be surprised how many prospective clients come to us wanting to settle, but when we ask how much they have to offer, they respond that they don’t have any money to offer. If you don’t have cash in your account today, there are creative ways to raise cash that you need to explore if you hope to settle your debt.