About half of the calls I get are from people who have SBA 504 loans. Some have sold their building, others have been foreclosed on, and yet other are falling behind on payments and don’t know what to do. The purpose of this article is to explain how the process plays out during a typical 504 loan workout.
First and foremost, if you expect to have the loan balance reduced, the building needs to be sold (either via short sale or foreclosure). The SBA will settle 504 loans even if your business remains open (note: this is not the case with 7a loans) so the major pre-requisite for settling a 504 loan is the liquidation of the real estate that your 504 loan financed.
If you plan on doing a short sale, there is a major point that needs to be understood. The sale of the building and the settlement of your personal guarantee ARE TWO SEPARATE EVENTS. Many borrowers are surprised to get letters from their CDC or from the SBA following a short sale because someone erroneously told them that they would not be liable once the real estate is sold. This is most certainly not the case. While the short sale typically pays down most, if not all, of the 1st lenders debt, it usually leaves a balance on the SBA loan that needs to be dealt with. The reason it needs to be dealt with is because in 99.9999% of cases you signed a personal guarantee. This means you are personally responsible for the debt, even if the business goes under.
People often gripe that it’s not fair that the SBA won’t negotiate a settlement of the personal guarantee in conjunction with the short sale. And they are probably right. But that doesn’t mean that the SBA will be flexible on this point. I’ve seen people threaten to walk away from a short sale unless the SBA approved their Offer In Compromise before the short sale closed, and to their surprise, the SBA didn’t blink. The deal died, and the debt didn’t get settled (shameless plug: situations like these are when a guy like me comes in handy. I know what points are negotiable, and which ones are not).