(9/1/18 Update: Two loans that I settled directly with the SBA (i.e. not through a bank) were both reported to credit bureaus. Both client’s disputed it on grounds that they debt was commercial, not consumer. Both have reported that the credit bureaus removed it after following up.)
For many small business owners, their credit history is a source of pride. For years, their payment record has been pristine. They’ve never been late on a payment, and the idea of defaulting with a creditor was not even a possibility. All that changed when the recession hit in late 2008. They wanted to pay their creditors, but there literally was not enough money to pay everyone.
Today, when potential clients contact me, one of the first questions they ask is: “if an SBA settlement is approved, how will it impact my credit?” Like almost every other question I get, my answer is “It depends.”
When they ask about “credit”, most people are referring to the credit reports that are issued by the three big credit reporting bureaus – Experian, Equifax, and Transunion. People basically want to know if their credit score will fall as a result of a settlement. Whether or not that happens depends on one factor: does your lender report to the credit bureaus?
Surprisingly, not all lenders report to the credit bureaus. I worked for the lender who was the largest 7a lender for a number of years, and they did not report to the credit bureaus. Regardless of whether the borrowers paid on time or were 90 days late, it was never reflected on the personal credit of the borrower or personal guarantors. The lender’s rationale was that since it was a commercial loan, it did not need to be reported. Of course, some lenders do report to the credit bureaus, in which case the fact that you defaulted and settled your SBA debt is likely to impact your personal credit score.
If you are unsure if your lender ever reported the loan to credit bureaus, every borrower is entitled to a free copy of their report from each of the three credit bureaus on an annual basis. Unlike the commercials you see on TV for “free” credit reports, www.annualcreditreport.com truly is free because the credit bureaus are required by law to show you what is on your credit report.
In addition to what can be viewed on a credit report, it’s important to remember that even if a credit event is not reported on a credit report, it doesn’t mean that a future lender won’t ask a question about it if you apply for a business loan for a new venture. Lenders will often ask for a resume of the business owners, which could inevitably leads to a discussion about your failed venture and whether any lenders lost money as a result.
Overall, my take on the subject is that regardless of whether your lender reports to the credit bureaus or not, most borrowers stop making their payment not by choice, but rather because they can’t afford it. If a borrower has the luxury of deciding whether or not to pay their bills, they probably aren’t going to qualify for SBA loan forgiveness anyway since the SBA OIC process is designed to help borrowers who lack the resources to repay their debt in full, not because it’s inconvenient to honor the obligation.