Hi folks! Welcome to my website. My name is Jason Milleisen, founder of Distressed Loan Advisors. I’ve been helping SBA borrowers since 2008 (SBA settlements are all that I do!). I know articles can be helpful, but nothing can replace a conversation. If you’d like to schedule a consultation, you can do so here.
Okay, let’s talk about what happens if your business closes and you have:
- an SBA 7a loan,
- a PPP loan,
- an EIDL loan,
- an SBA disaster loan
- an SBA 504 loan, or
- an SBA loan that has been referred to Treasury.
There are so many different types of SBA loans floating around these days, it can certainly be confusing at as to what your options are in the event of a default or business closure. So in this article, I’m going to cover what happens with the above mentioned types of SBA loans if you decide that the business is no longer viable.
The great thing about PPP loans is that they were intended to be forgiven from the beginning. The stated goal of the SBA Is to keep businesses open, and more specifically, keep employees of those businesses working.
PPP were really a workaround or an alternative to putting all these people on unemployment. So rather than collect unemployment, the money, which paid from the SBA to the business, who then turned around and paid their employees (even if they weren’t operating).
So, what happens if your business closes and you have a PPP loan that’s outstanding? Well, as long as you’ve used the funds correctly (i.e. you used it for payroll) then you still can have your PPP loan forgiven.
The SBA has a PPP forgiveness application. You submit it, they review it. If all looks good, it’s completely forgiven. The only way in which a PPP level would not be forgiven would be if the funds were used for an unapproved purpose.
EIDL loans, I would say, are a cousin to the PPP loans.
The reason I say the EIDL loans is a cousin to the PPP loan is that this loan was not explicitly stated that they intend to forgive it. However, in a lot of circumstances, these loans are not going to be paid back and there will be no repercussions to the owners of the business. So, in a way it kind of acts like a grant. Here’s what I mean by that…
Let’s say I have a restaurant and in order to keep the business going, I took an EIDL loan for $199,000. After a while, it becomes obvious that despite the loan, my restaurant is not going to be able to survive. So if I close the business, what happens to my SBA EIDL loan?
Well, it’s pretty simple. The SBA did take a lien on the business assets. However, the business assets, in most cases, if you have any other types of loans, particularly SBA loans or small business loans, the assets of assets of that business have likely been pledged already.
This means that if you owe enough money, that the value of those assets will be used up very quickly to repay your primary (non-EIDL) debt. What this essentially means is that the SBA EIDL loan is completely unsecured and not guaranteed by you personally.
So once you close your business and the assets get liquidated with the proceeds going to your primary lender, who has the first priority lien, there’s really not a whole lot else to do.
Make sure that you don’t use the borrowing entity again (your LLC, S-Corp,C-Corp etc), as that entity will still be liable if they were named as the borrower. Aside from that, there’s really nothing else that you need to do.
If the SBA wanted to pursue your corporation, LLC or whatever corporate structure you have, they can certainly do that, but it’s not going to be very productive for the SBA. The reason for this is that if the entity isn’t operating anymore and there are no assets or income for them to pursue, it would be a complete waste of money to sue that entity.
If you’re not personally liable, you don’t need to worry about them coming after you. YAY! One less thing to worry about.
SBA disaster loan are loans that are during following a hurricane or some other natural disaster. Now, these loans are serviced differently than other types of SBA loans. So if you’ve got a disaster loan, unfortunately it’s probably going to be difficult to settle.
Disaster loans are serviced in different offices than regular SBA 7a loans, and the people that serviced them, let’s just say, they’ve never appeared to me to be the sharpest of employees. My experience was that not only were they more interested checking boxes, they were also fairly arbitrary about the amounts that they demanded for settlements period.
I had a guy who owed close to $1 million dollars. He could offer a substantial sum, but they were insisting that it had to be a minimum of 50% loan balance, which he was he incapable of doing. It’s always been beyond me why it’s a good business decision to ask for arbitrary settlement amount.
SBA disaster loans have an ironically accurate name. They really are a disaster.
US Treasury aka Where SBA Loans Go To Die
I also want to touch on loans that have been referred to the US Treasury. Now, there are no loans that actually come directly from the US treasury. Rather, the stuff they try to collect has been referred to the treasury are all types of defaulted SBA loans.
The Treasury is essentially where the SBA sends all the loans that they deem to be collectable. And the government mandates that they be sent over to the US Treasury. The us treasury doesn’t care what type of loan you originally had. They’re generally going to ask for the same thing from everybody.
They look for people to pay back a substantial sum in a lump sum of cash, that for most people, isn’t possible. And for that reason, most loans that get referred to the us treasury are very, very difficult to settle with.
That said, it doesn’t mean you have no options. It just means that your options are limited and typically don’t include settlement. So what ARE your options?
Now, I realize that when I say there are other options, they’re not really fantastic options. The best option in theory would be able to settle this for a reasonable amount based on your circumstances. But unfortunately, I have no say in how the treasury goes about their collection business.
For a lot of people, a viable option is filing for personal bankruptcy. SBA loans can be included in personal bankruptcy. Obviously you want to speak to a bankruptcy attorney, but I’ve had plenty of clients use bankruptcy as a plan B.
One alternative to settling your debt is that the Treasury will entertain payment plans. But in many cases, I advise clients not to take them due to their owner’s terms. In a lot of cases, they’ll ask you to make 12 months of payments with no guarantee of what they’ll do after say a 12 month period.
In a case like that, my concern for my clients is that they make those payments for 12 months and then the treasury service, they are no longer willing to accept payments. In which case the 12 months of payments are essentially down the toilet.
504 loans are generally used for real estate. The way you would know you had a 504 loan would be if you have two separate loans. There’s going to be one conventional loan from a bank, and then there’s a second loan from the SBA. These loans typically only require 10% down. So 50% is from the lender. 40% from the SBA, and then 10% down for the borrower.
These loans are serviced down south. I believe it’s the Little Rock, Arkansas loan servicing center. When I first started my consulting business circa 2009, 504 loan used to be able to be settled. No more, my friends.
Either someone in management changed their mind about how they want to handle them, or whoever’s in charge changed. And they went from them considering fairly reasonable settlements to asking people for large impossible amounts. And for this reason, I haven’t seen a 504 little loan settle in a very long time.
SBA 7a Loans
And last but not least is the SBA 7a loan. This is the type of loan that historically is most likely to sell. This is the loan that has kept me busy for the past 10+ years.
7a loans are serviced at various servicing centers around the United States. My favorite office to try to settle with is the Herndon, Virginia office. They has the most reasonable approach when it comes to the Offer In Compromise process.
I don’t always agree on their decisions, but at this point I feel like I have a pretty firm grip on what they’re looking for and what they’re willing to accept. You can read many articles on this website about SBA 7a settlements, because that’s what the vast majority of my content is about.
But in a nutshell, they’re willing to settle on terms that are reasonable based on your circumstances. You do need to provide full financial disclosure and you need to make an offer that is in line with your financial wherewithal.
If you’re going to blow smoke and make lowball offers, it will be rejected. If you make a fair offer and provide full disclosure that gives them the confidence that this is the best opportunity for them to recover some money.
So that’s a, that’s a synopsis of where we are in 2022 with respect to the most common SBA loan types. Want to understand your options? Schedule your case evaluation here.