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:
- 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.
- 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.
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