The Downside of SBA Loans

An SBA loan that helps your business grow is terrific, but if you run into tough times, one of these loans can turn into a nightmare. That’s because the same federal guarantee and collateral requirements that make these loans work can work against the borrower.

SBA loans almost always require a personal guarantee from the principals of the business. And for many loans, the borrower must pledge all available capital. That means, for example, if you have equity in your home you will likely have to pledge that collateral for the loan.

Though the federal government guarantees most of the loan, that guarantee is designed to protect the lender — not the borrower. When a borrower defaults, the government doesn’t just hand the lender a check and walk away. Instead, there will be a serious effort to collect as much as possible. Collection efforts are almost always handled by the lenders themselves and may include:

  1. Trying to collect from the owner of the business, who in most cases provided a personal guarantee. If necessary, they may sue the business and/or person(s) who agreed to be personally liable for the debt and get a judgment, which opens up new avenues for collection.
  2. Foreclosing upon or repossessing any collateral pledged for the loan, including personal assets (a home, for example) and/or business assets (equipment, inventory, etc.).

If you fall behind on an SBA loan, reach out for help. You may be able to settle the debt for less than you owe, or renegotiate
the terms while your business gets back on its feet. Your attorney, CPA or a firm that helps business owners in distress may be able to assist if you can’t do this on your own.

See Related Articles:

  1. How SBA Loans Work
  2. How to Apply for an SBA Loan

Learn More About Business Lines of Credit

Finance Your Own Business

Our book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.

Order Book Now
Free Shipping!

Fill out the form on this page and we will let you know when the new book is released and offer early bird discounts. Plus you’ll get a free guide today – The Levels of Business Credit. (And don’t worry: we know you’re busy so we won’t flood you with email.)