Note: This article is based on the video below:
Good morning, everyone! My name is Jason Milleisen, founder of Distressed Loan Advisors. If you’re interested in booking some time with me, here’s a link to do so.
Just a quick note: I’m testing out a 15-minute online text chat option. It’s a bit cheaper than my usual 30-minute phone call, so if you’ve been following my work but found the full session out of reach, you might want to give it a try. It’s up on the website for now, but if it doesn’t get any traction, I’ll likely take it down.
Today, I want to talk about a concept that often catches people by surprise: fraudulent conveyance. So, what exactly does that mean?
What Is Fraudulent Conveyance?
Fraudulent conveyance basically means you’re not allowed to sell business assets that have been pledged as collateral without the SBA’s permission. Think of it this way: just like you can’t sell your house without first paying off your mortgage, you can’t sell business assets without the bank’s permission if they’ve been used as collateral. Many people are surprised by this, and sometimes they don’t even realize they’ve done anything wrong until after the fact.
One reason it’s easy to overlook this rule is that business asset sales don’t have the same built-in safeguards as real estate transactions. When you sell a home, there’s a lien recorded on the title, and anyone interested in buying the property is going to do a title search. That search will reveal any liens, so there’s a clear process for ensuring everything is squared away before the sale goes through.
Business asset sales, however, are a different story. While someone could run an asset search and find a UCC lien on your business, it’s not always the case.
So, for instance, if you’re selling a piece of equipment, like a pizza oven, there’s usually no specific identifier in a UCC filing that tells a buyer, “Hey, there’s a lien on this oven.” This is especially true with EIDL loans because borrowers didn’t typically provide a list of specific assets as collateral.
How EIDL and 7A Loans Are Impacted by UCC Liens
For EIDL loans, any loan over $25,000 has a UCC lien filed against the business, and for 7A loans, it’s virtually all loans. If you’ve granted a security interest to the SBA, you cannot sell those business assets without permission. Let me give you a scenario to explain why this matters.
I recently worked with a borrower who tried to sell some equipment after her business had closed. She had reached out to the SBA for approval but didn’t hear back. Since she didn’t get a response, she went ahead and sold the equipment for about $5,000.
In an effort to do the right thing, she informed the SBA about the sale and asked where to send the money. Their response? They told her it was fraudulent and referred her case to the Inspector General.
The Inspector General is the federal watchdog overseeing waste, fraud, and abuse. In theory, they could investigate the situation, and that borrower could end up in hot water simply because she sold collateral without explicit permission. So, if you’re wondering why you shouldn’t sell without permission, avoiding a referral to the Inspector General is a pretty good reason.
The Impact on Offer in Compromise Eligibility for 7A Loans
Another reason you should avoid selling assets without permission, particularly for 7A loans, is that it can completely shut down any chance of an offer in compromise.
If the SBA learns that you sold collateral without approval, they’re not likely to entertain an offer in compromise, which is essentially a settlement option for borrowers who can’t afford their full loan payments.
Even if you intend to send the money to the SBA, it’s still considered fraudulent conveyance. You’ll further compound the issue if you pocket the money or use it to pay another creditor.
So, even if it’s just a few thousand dollars in equipment, it’s not worth jeopardizing a potential settlement option.
Why You Should Be Extra Cautious with EIDL Loans
Currently, there’s no offer in compromise for EIDL loans. But, that could change. If the political landscape shifts, we might see adjustments to the EIDL program, including options like interest forgiveness, further deferments, or even an offer in compromise.
However, if you’ve sold collateral without permission, and it’s considered a form of fraud, you may be ineligible for any future relief programs. So, don’t sell assets without the SBA’s permission. It could limit your options if new programs or relief options are introduced down the line.
Why It’s Better to Let a Buyer Walk
You might be thinking, “But I could really use the cash from selling that equipment.” Here’s the thing: any money you get from selling collateral is supposed to go to the SBA anyway.
So, it’s not money that’s coming out of your pocket in the end. Instead of risking a referral to the Inspector General or losing eligibility for a potential settlement, it’s better to let a buyer walk away.
In the end, selling business assets without permission isn’t worth the risk. Letting go of a sale opportunity is a much better option than putting yourself in a position where you could face fraud allegations or lose out on future assistance.
If you’d like to discuss this in more detail, or if you have any questions about SBA loans and collateral, feel free to reach out. And again, if you’re interested in the new 15-minute online consult, it’s available on my website for a limited time.
Thanks for reading, and I’ll see you next time!
