If you are like many small businesses, you eventually hit a financial roadblock. It may be because of the economy or because your customer's needs have changed. But while you are struggling to survive, you are not only dealing with cash flow problems but also facing SBA loan default.
If this is your case, you are not alone. Hundreds of thousands of small businesses all over the country apply for and get new SBA financing every year. And the majority of these will go out of business during their first five years. Facing SBA loan default is common.
So what should you do about it? Should you just default and not pay back your loan? After all, the SBA or Small Business Administration financially backs up all SBA loans through the bank. The bank stands to lose nothing, so why should they pursue you?
SBA Loan Default And Personal Guarantees
Unfortunately your situation is not so simple. Even though the SBA does back all of these loans, this is never enough of an insurance policy for the bank. Usually they require every business owner to put up additional collateral to secure the loan.
Try to recall what happened during your SBA loan application process. Likely before you were approved, the bank forced you to give a personal guarantee for the principal amount. This meant that you, the small business owner, had to put up your house, retirement fund or other personal asset to secure the SBA financing.
When facing SBA loan default, the bank has every right to, and will, call in your personal guarantee. You will lose your house and your personal assets to pay back the bank. Once the personal guarantee is paid, and if you still owe money, only then does the SBA backing kick in. That's it. End of story. The bank still gets all its money and you lose if you default on the loan.
So what do you do when your business is financially strapped? The most important point here is to prevent SBA loan default to begin with. If your business is struggling, it's time to turn it around. A business turnaround can get your company back on track financially. If you create and follow through on a business turnaround plan, you can make your business profitable again.
Once you are profitable pay off any SBA loans based on personal guarantees. This way you will never find yourself facing SBA loan default again.