Lately, we’ve been hearing from a lot of upset business owners. They are not upset because their business has closed or is struggling – they have come to terms with the economic downturn. Instead, they are upset because they feel that they were misled by their lender when they first took their loan. More specifically, borrowers tell us, they were led to believe that an SBA guaranteed loan meant that if they defaulted on the loan, the SBA would reimburse the bank (that part is true) and that the borrower would be able to walk away with no further obligation (that part is not true).
Just to set the record straight: THE SBA GUARANTEE IS A GUARANTEE FOR THE LENDER ONLY. IF YOU HAVE AN SBA LOAN AND YOU DEFAULT, YOU ARE RISKING LEGAL ACTION AGAINST YOU.
So if the guarantee is just for the lender, what’s the point of an SBA guaranteed loan? Good question. In theory, SBA loans are meant to provide funding to small businesses who do not qualify for conventional bank financing. Since banks are concerned with making a bad loan (and losing money), the SBA offers to reimburse the bank for a portion (the percentage varies by program) of the loan in the event that the loan goes bad.
More than once, borrowers come to us confused and angry, as they feel that when they were given the loan, their lender failed to mention that while the guarantee resulted in them being approved for a loan, the guarantee was worthless to the borrower in a default situation.
Now let’s be clear about this: We are NOT accusing lenders of being predatory or misleading. Rather, the confusion about the guarantee is probably the result of poor communication. The lender knows the deal, so when the borrower asks “So if I default, the government guarantees the loan?”, the lender says “Yes, that is correct”. The borrower assumes they understand the deal, and the lender assumes the have sufficiently answered the inquiry. In a case like this, it’s really just a matter of the borrower assuming that the SBA guarantee being the same thing as their rich uncle guaranteeing, when in fact this is not the case.
The only suggestion we can make to remedy this huge misconception is to have lenders put a statement in big bold letters on every SBA loan application similar to the one we wrote above: THE SBA GUARANTEE IS A GUARANTEE FOR THE LENDER ONLY. IF YOU HAVE AN SBA LOAN AND YOU DEFAULT, YOU ARE RISKING LEGAL ACTION AGAINST YOU.