In most cases people have invested a good portion of their life savings into the business now going under. Losing your business is a terrible thing. And, being faced with the prospect of repaying your SBA Business Loan with little or no savings and the loss of your business is daunting.
In a majority of cases, business owners opt to work with their Lender to put the business on the market and sell it to a third-party or simply liquidate the assets piecemeal. Here are a couple of common questions and the answers will probably surprise you.
Can I really do a better job than the bank in selling my business?
In almost all cases you can. Lenders are not in business of selling businesses, they make loans. They can repossess the collateral and, in rare cases, they could appoint a receiver to operate a business and then sell it, but in our experience, the business owner is in the best position to maximize recovery here.
If you can arrange for the sale of your business, you are likely going to avoid a brokerage fee of between 6-12% (or more). Or, if the bank repossesses the assets and auctions them the cost of doing so will get charged to the loan (increasing your balance). In many cases, auctioneers charge between 25% – 35% to auction off miscellaneous assets; those buying them are looking for bargains. If your business is a franchise, then the franchisor may want to place someone else in your location and this may also result in that party assuming (taking over) the ground lease as well.
If you are thinking about selling your business assets, talk to your Lender and your attorney and determine the best course of action.
Will the proceeds from the sale count against what I owe the Lender?
Yes. The purchase price will be applied to what the Borrower owes the Lender on the loan. But, be careful here. The assets belong to Borrower and the Borrower’s legal liability has been reduced, but if the proceeds from the loan don’t fully payoff the loan then a deficiency will result. In other words, the remaining balance must be paid — by the guarantors!
Won’t the proceeds from the sale of the Borrower’s assets count against my Offer in Compromise?
No, the balance you are compromising has now been reduced from X to Y because of the sale. As a guarantor you must now settle that liability yourself. For example:
1. The original loan balance is $100,000
2. The sales proceeds are $30,000
3. The Deficiency balance (whats left) is now $70,000
4. The credit you receive as a guarantor against your offer is $0; that’s right – zero.
As a guarantor, you must now make an offer to compromise your individual liability to the Lender under your guaranty agreement. This means that you, as a guarantor, must offer something more to settle the $70,000; this money must come out of your own pocket or be borrowed. It cannot come from any remaining cash in the business bank account or from the sales proceeds.
Before your discuss your offer in compromise with the Lender, talk to your attorney first. Ask how the proceeds from an asset purchase will be applied. This answer can come as a shock to a business owner who is losing their business and must now settle the remaining loan balance. Therefore, be sure you have a plan to fund your offer in compromise because selling the business only solves part of the problem, but will still leave you on the hook in almost all cases.
We are frequently asked by business owners whether they can sell their business assets after an SBA loan default. The short answer is – yes, but the longer answer involves working with the your Lender to get permission to do so. Under your security agreement the lender has what is known as a security interest.
What is security interest?
In the context of an SBA Loan, a security interest is a legal right granted by the Borrower to the Lender over the Borrower’s property (usually referred to as the collateral). The security agreement provides the Lender Bank with recourse to the property pledged as collateral, if the debtor defaults in making payment or otherwise performing the secured obligations.
How do I know if my business assets are pledged?
Any Borrower closing an SBA loan should expect the Lender to place a blanket lien against the assets of the business. Lenders will file a UCC-1 financing statement. This form is filed in order to “perfect” a creditor’s security interest by giving public notice that there is a right to take possession of and sell certain assets for repayment of a specific debt with a certain priority. You cannot sell assets subject to such a security interest without first paying off the loan giving rise to the security interest in full or getting permission from the Lender to to do so.
I have a buyer for the business assets. What can I do?
If you want to sell the assets of the business to help pay down the loan, you should discuss this option with your attorney before making a commitment to any party to do so. Your attorney may suggest drafting a non-binding letter of intent (LOI) and forwarding this to the Lender for review. Lenders liquidating collateral must take care to act in a prudent manner or risk losing their SBA guaranty rights. Therefore, a Lender will want to compare the offer in the LOI to their appraisal numbers before approving a sale.
You should avoid signing any contract for the sale of your business assets unless your attorney has reviewed it first. In many cases a “condition precedent” to closing the sale should require a written consent by the Lender approving the terms of the sale – in particular, the sale price and the list of assets being sold.
What if my offer is not accepted by the Lender?
If your offer is not accepted by the Lender you should discuss this fact with your attorney. Without the Lender’s consent to the sale, they will not release the lien placed on the business assets and you will not be able to grant the buyer good clean title to the assets; this is something the buyer expects. In most cases, the buyer’s attorney will have required a representation and warranty from you that you do indeed have the ability to give the buyer title to the assets free and clear of all liens.
Asset Sales are Common, but Use Caution.
If you sell the assets to the buyer anyway, you may be subject to suit from the buyer, the Lender and the SBA (in some cases, your actions may trigger prosecution for a criminal offense). Therefore, it is critical that you act carefully and seek qualified legal counsel to help you review offers from any prospective buyer.
Many people contact our law firm after receiving an SBA 60-day letter demanding that they pay the entire amount due under their company’s defaulted SBA loan. And, time and time again, we hear, they protest claiming they only own 25% percent of the company and so should only be responsible for 25% of the debt, if any at all. In fact, most ask why if the company is a limited liability company (LLC) they should owe anything at all. The problem: the unconditional guarantee they signed.
Ordinarily, a member of an LLC will not be liable for the debts of the company, especially if they sign documents in their capacity as a Manager of the LLC and not as an individual. However, when one signs a personal guarantee that all goes out the window. Not only are you liable to repay the Lender and/or SBA if the company fails, but your liability is joint and several, meaning that the Lender and SBA can come after any one of you for all of the debt not just part of it. In short, your percentage of ownership has nothing to do with the extent of your liability.
Although the SBA tends to issue demand letters to all guarantors, when your loan first goes into default, the lender may sue the Borrower and all guarantors and then obtain a judgment. In some cases, the lender will pursue collection of the judgment, right away, particularly if they know that one or more of the guarantors have a substantial amount of non-exempt (unprotected) real estate with equity or a large stock portfolio not in their 401K. If this happens, the Lender might even recover most if not all of the debt from one member, leaving the others largely unscathed. In that event, while the one member may be able to seek contribution from the others, that problem is theirs alone to sort out.
Before you sign that unconditional guarantee be sure you understand what might happen if the borrower defaulted. How are you positioned relative to the other guarantors? Who is going to get hit the hardest — is it you? And, are all the members ready to share the pain with you? Its not a happy thought, but its better all guarantors consider this situation before they sign.
Owing the federal government a debt can be a frightening experience. Once your defaulted SBA loan makes it was to the Treasury, it is likely that you will soon be contacted by one of the collection agencies that handles the collection of government debts. The calls and the letters can be intimidating, but more dangerous can be the entreaty to simply setup a payment plan to pay an amount you can afford. While this is not always a bad idea, it is important to understand the risks. A collection agency may threaten wage garnishment, a remedy that is allowed under federal law, even if your state’s law would ordinarily bar it. However, if you simply make voluntary payments you need not worry about the trauma and embarrassment of administrative wage garnishment. This sounds appealing and perhaps even a reasonable bargain, but is it?
If your SBA debt is very old, it may be that the SBA and Treasury no longer have the right to file a lawsuit against you. This concept is called a limitations period or statute of limitations and this limits the time a creditor has to file a lawsuit against you. However, if you are in a state where your homestead equity is not completely protected, a lawsuit might result in a judgment against you. With a judgment in hand, the government could, in fact, quite possibly force the liquidation your home. Even though you did not pledge your home as collateral for the SBA loan, the judgment may give them the power to take what they otherwise could not reach. Fortunately, the SBA has only 6 years to file suit (how to measure this is something to discuss with your attorney). But, if you make a voluntary payment to the government, even if this period has expired, it is possible that you will revive the statute of limitations. If you do so, you may open yourself up to a lawsuit where previously none was possible.
When the government’s collection agency says only pay what you can afford, the price for peace of mind may end up costing you far more than you can afford. If you receive a notice or collection letter purporting to be collecting on a defaulted SBA loan, contact your attorney before making any admissions or payments to the collection agency. Have your attorney explain the ramifications of entering into the payment plan and be sure it is in your best interests to do so. Payment plans are not always a bad idea, but forewarned is forearmed.
Scenario 1. My business may close because I don’t have enough working capital.
If you are facing an SBA loan default, then you may want to consider selling your business. If your business has a good track record, but your business is starved for working capital, a loan assumption may be an option. In some cases your loan may be assumable by a third-party buyer who can then step into your shoes, purchasing both the assets and assuming the debt creating a win-win for you and the bank.
Scenario 2. My business is doing well and we want to sell, but we have an SBA loan outstanding.
When you start a business, apart from the income it generates, there is always a need for an exit strategy. It may be that you need to move to take advantage of new opportunities or simply retire. When you have an outstanding SBA loan, you may be able to work with your bank to sell the business and achieve those goals. However, as with the first scenario, you need to be sure you really have “exited” and that no further personal liability exists under the unconditional personal guarantee you signed when the SBA loan was originated.
My loan was assumed, so why should it matter if the new borrower defaults?
Your bank will likely be happy to help facilitate a loan assumption to avoid a default. And, you banker may also be willing to work with you to help facilitate an exit for retirement. Certainly, this sounds like a win-win situation for all parties. However, the devil is in the details. It is important that you work very closely with your attorney to ensure that the SBA actually releases you from the unconditional personal guaranty you signed when you originated the loan. One would think that would be the default result, but that is not the case.
If the new borrower defaults, the bank may certainly pursue them and the new guarantors; however, if neither the new borrower or the new guarantors pay up, and instead file bankruptcy, then the bank may still have recourse against you. In order to avoid this dire situation, you and your attorney should read the fine print of the legal documents together and confirm that you are expressly released. Your banker may also think that that you are released, but it is the fine print in the final documents that count. Remember, the bank, well meaning or not, does not represent you. You must look to yourself and your own attorney to protect your interests.
In order to qualify for the U.S. Small Business Administrations (SBA) loan programs, you and your partners must meet certain eligibility requirements? But, isn’t good credit, a solid business plan and collateral enough? No, SBA also looks at your “character”. SBA is also looking for good character and a mistake in the past can trip you up and prevent your loan from closing. SBA is looking at your behavior, integrity, candor and past criminal record. SBA Form 912 is all about you not your credit score per se and not your collateral.
As set forth in current SBA Loan Program Requirements, to be eligible for an SBA Advantage loan, every proprietor, general partner, officer, director, managing member of a limited liability company (LLC), owner of 20% or more of the equity of the Applicant, Trustor (if the Small Business Applicant is owned by a trust), and any person hired by the Applicant to manage day-to-day operations (“Subject Individual”) must be of good character.
What if I have a felony in my past?
Per the SBA’s Procedural Notice dated December 14, 2016, when a Subject Individual discloses a felony conviction, a background must be completed by SBA and the Lender must submit a copy of the complete SBA Form 912, the Subject Individual’s written explanation, supporting information, court documentation, and FD 258 to SBA. The Lender may not disburse the loan until formal clearance from SBA is received in writing. OPS will conduct a background check that will include a Fingerprint Check via submission of the FD 258 to the FBI or Electronic Fingerprint Submission, if available.
For felony convictions, Lenders must submit to SBA the complete and detailed Form 912 package signed by the Subject Individual within 90 calendar days prior to submission to SBA.Upon receipt of the complete Form 912 package, the Office of Personnel Security (OPS) will request the fingerprint check from the FBI. The FBI generally takes 30 days to process fingerprint checks. Once OPS receives a report back from the FBI, OPS will refer the matter to the SBA Director/Office of Financial Assistance (D/OFA) or designee to make the character determination as follows:
1. On receipt of the OPS referral, OFA will issue a character determination in the form of a memorandum to the SBA Field Office or LGPC, as identified by the Lender in the 912 package.
2. OFA will determine either that the Subject Individual has good character, or that an applicant is not eligible for an SBA Advantage loan due to the Subject Individual’s
lack of good character based on the Form 912 package and the information received from the FBI, including any failure to disclose offenses.
3. OFA transmits its memorandum with the character determination to the SBA Field Office or LGPC, as identified by the Lender in the 912 package, via email. OFA will
not provide information directly to delegated lenders or non-delegated lenders.
4. The SBA Field Office or LGPC will advise the Lender in writing of the Agency’s clearance decision.
5. The OFA memorandum and the FBI reports are deliberative and confidential, and also contain information protected by the Privacy Act. As a result, this information must not be released outside of SBA.
In sum, a felony is not necessarily the end, but it will be an uphill battle and you better have a great explanation for the indiscretions of your past and a exemplary record since, if you expect to get a clearance letter. Keep in mind that regardless of the SBA’s own requirements, the Lender may have even stricter requirements to participate in their SBA lending program. And, don’t think about flubbing the answer. Information and financial disclosures submitted to the SBA are generally under penalty of perjury.
If the Small Business Administration (SBA) has accepted your offer in compromise, then congratulations are in order. But, be warned, you must follow the terms of your offer precisely and make all payments on time or risk default. In many cases we are approached by well intentioned people who established settlements with the SBA calling for payment of the settlement in equal consecutive monthly installments; however, for one reason or another they missed a payment or two. Missing a payment can have disastrous consequences and result in a referral to Treasury, the imposition of additional collection fees adding nearly 30% to your original debt, less a credit for your prior settlement payments and the resumption of interest on the uncollected balance (this assuming the SBA agreed to zero interest settlement for you).
I knew a default was bad news – what can I do?
If you have been advised that your SBA OIC is in default you must act quickly. It may not be possible to get the original settlement back by simply making up the missing payments and a new SBA Offer in Compromise may need to be submitted. There are simply too many variables in these cases and consulting a licensed attorney with experience in this area should seriously be considered.
Missing a payment and paying ahead are both equally dangerous
How can paying ahead be bad? When the SBA accepted your offer to pay in installments, it programmed its computers to look for payment in accordance with its terms; in most cases equal, consecutive, monthly payments of an exact amount are called for under the agreement. Many people concerned about defaulting think that paying ahead can protect them from default by establishing a cushion of sort. However, that is a very dangerous train of thought. In fact, all you will do is pay down the balance and in effect short the remaining duration of your agreement (much like paying a mortgage off earlier), but the next month’s payment will still be due. When the SBA’s computers fail to register payment, you are at risk of default and the account may be referred to Treasury (this process is highly automated).
If you have paid ahead on your offer, but nonetheless received a notice of default, you should contact the SBA at once and explain the situation or consult with a licensed attorney experienced in this area. Although it may seem unfair, the government may strictly enforce the terms of your settlement to the letter. Instead of appreciating the gesture on your part, they may refer the debt to Treasury! Remember, SBA computers do a lot of this work and once transferred to Treasury, the SBA staffers may be unwilling to even discuss the matter.
Can I pay off my settlement early?
If your payment will completely pay off your settlement, then you may be able to do so safely, but you should contact the SBA or advise your attorney before doing so. The terms of your offer control and making a mistake can cost you dearly.
Before referring a debt for collection by administrative offset, a creditor agency must provide each debtor with:
(a) a written notification of the nature and the amount of the debt, the intention of the agency to collect the debt through administrative offset, and an explanation of the debtor’s rights;
(b) an opportunity to inspect and copy the records of the agency;
(c) an opportunity for review within the agency; and
(d) an opportunity to enter into a written repayment agreement.
Can they offset my tax refund and then tell me after the fact?
Yes, after the debt has been referred for administrative offset and an offset is taken, the disbursing official conducting the offset must notify the debtor/payee that the offset has occurred (including the amount and type of payment that was used to pay the debt) and the identity of the creditor agency requesting the offset, including a contact name. The specific timing of the notice is not mandated for tax refund offsets.
What if I did not receive a notice at all?
Regardless of the type of payment, failure of the debtor to receive notice will not affect the legality of the offset (withholding).
Is it true that I will be barred from accessing SBA loan programs in future if I don’t pay my debt in full.
Yes, its is very likely, but not certain. If this is a concern, you should discuss with your attorney. Under the current law, an agency must deny credit to a delinquent, debtor unless this requirement is waived by the head of the agency or the Chief Financial Officer. The delinquency can be resolved or fixed by the debtor entering into a repayment plan for collection of the amount of the delinquency or by paying the amount of the delinquency in full.
Are there standards for determining if I will get a waiver?
Yes and No. This is a developing area and Treasury is working on guidelines for the agencies to use in setting their own standards for waivers. These guidelines will include the expectation that an agency will balance whether the denial of credit would be contrary to the purpose of the program under which the credit is being made against the intent of the law to ensure that the federal government does not continue to provide funds to known or repeat delinquent debtors.
If you received a Notice of Intent to Initiate Administrative Wage Garnishment (AWG), you must act quickly. You have a right to contest the garnishment action, but if you wish to have the garnishment action suspended pending a hearing on the matter, you must file a timely request for hearing. The key word here is “timely”, so its very important to understand the definition and to understand that it will depend on how you transmit that request. It works as follows:
Timely. A hearing request is timely if the request for hearing is postmarked (if mailed) or received (if not mailed – e.g., fax, commercial delivery service [FedEx] or in person delivery) within 15 days of date of the AWG notice. If the hearing request is timely, AWG cannot proceed until the hearing is completed and the decision is communicated to the debtor
Untimely. A hearing request is untimely if the request for hearing is postmarked (if mailed) or received (if sent any other way) more than 15 days after the date of the AWG. If the request is untimely, garnishment will not be stopped, unless the hearing decision is not issued within 60 days.
As you can see, filing your hearing request quickly is essential, but if you still missed the boat, don’t despair – Treasury rarely gets to the hearings in 60 days and so while it is not guaranteed that the garnishment will be stopped in the interim, it frequently still does get put on hold. Therefore, even if you failed to act within the 15 days, you may still have a shot and putting the garnishment on hold. Avoiding garnishment is well worth the effort because one you are being garnished ofttimes Treasury will not bother discussing voluntary payment options that might avoid the distress of a enforced collections.