Defaulting on your SBA guaranteed loan is no fun. You poured your heart and soul into starting or expanding your business, and to do that, you decided to take an SBA loan. The plan was NEVER to default. And you knew, of course, that if you ever were to default, there would be be serious consequences. Now, in some cases, failure of your business can in fact be prevent. There are plenty of bad operators out there. There are some people who had no right owning a business in the first place. At the bank I used to work at, we said that many people were simply attempting to “buy a job”. They didn’t have the skills needed to be a business owner, despite the fact that were formerly a worker within the business. There IS a difference between being a great employee who is great at their job, and being a great business owner. With all that said, there are certain circumstances that are out of every business owners control, and regardless of how great a business you have, and how talented an operator you are. Let’s look at a few of these situations:
1) The Economy – An obvious one. Nobody knows when the economy will next take a dive. Back in 2008 during the Great Recession, I was working for a bank. One day in September 2008, it was business as usual. The next day, all hell broke loose. The bank I worked for actually cancelled loan approvals that had already been communicated verbally to the borrower. If they had not signed a formal loan commitment, the bank declined their loan. There were people who had already signed leases, paid franchisors, or made down payments on their business. While all that is bad, do you know what’s even worse? Try being a business owner that closed on their loan in August, only to have the economy come to a grinding halt only days or weeks later. When people stop spending money because they are afraid that the economy will never recover, it doesn’t matter how good an operator you are.
2) Unscrupulous Sellers – Every month or two, I get a call from a business owner who purchased a business, only to find out that the former owner misrepresented some major facts about the business, or even lied outright. Things like losing a major customer just before closing (but after all due diligence was completed) or losing a key employee can be devastating to a buyer. I’ve also had business owners tells me that after they completed an acquisition, the former owned violated a non-complete and took a significant number of clients with them. While due diligence prior to financing an acquisition with an SBA 7a loan is standard, it’s sometimes impossible to know or discover that a seller has screwed you over until it’s too late.
3) Bad Luck – Some people think that luck plays no role in success. I don’t happen to agree. It’s hard to know that when you opened your burger joint, 3 others opened on the same block 2 months later. You couldn’t have known that pipe was going to burst, ruining your inventory. You couldn’t have predicted that your spouse would pass away, leaving you to run a business that you never really had anything to do with.
These are just a few scenarios, but my overall point here is that there are many reasons why businesses fail, and not all of them can be prevented. So if you default on your SBA loan, there is no need to beat yourself up about it. You will, however, need to deal with it. While it’s not the ending you planned for or expect, the fact of the matter is that even if the failure of your business is not your fault, you will still be liable. Some people wonder why they are still liable if their business is an LLC or S-Corp, not realizing that virtually all SBA loans require a personal guarantee as well, which means that regardless of the corporate structure, you will personally be liable if you are unable to make payments on your SBA loans.
If you found this site, perhaps you were looking for some SBA Offer In Compromise tips or advice. And it was smart to do that, because in order to put your defaulted loan to rest, it will require you to successfully settle your personal guarantee. If this sounds like you….give me a call.