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.
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.
The answer depends on whether or not you satisfied your obligations to the federal government. If you signed an Unconditional Personal Guaranty for a commercial loan backed by the Small Business Administration (SBA), then you are responsible for the payment of the debt in the event your brother does not or cannot pay. In due course, the SBA will send you a notice letter that is effectively a demand for payment. If you do not pay the debt or make suitable arrangements agreeable to the SBA, then the debt will be referred to the U.S. Treasury Department for further collection activity.
Apart from being placed into the Treasury Offset Program (TOP) and being exposed to tax refund intercept, administrative wage garnishment and the offset of other federal benefit payments like social security, you will be placed into the Credit Alert Interactive Voice Response System (CAIVRS).
CAIVRS receives inputs from DOJ, Education, SBA, HUD, USDA and the VA. CAIVRS Reporting System is a system maintained by the federal government that lists persons who have defaulted or had a loan foreclosed within the last three years on a debt owed to the Federal government or are currently delinquent on a debt owed to the Federal government. When you apply for an SBA Loan, participating lenders are required to check the CAIVRS database to determine whether the individuals or businesses identified in applying for the loan have either a delinquent federal debt or a prior loss which bar them from SBA financial assistance.
The government has a long memory and there is no statue of limitations on the collection of an unpaid non-tax treasury debt under the TOP program. So, before you sign on the dotted line, think hard. if the government takes a loss, you will be barred from the SBA loan program.
If you would like more information on this subject, you may contact the Perliski Law Group at (214) 446-3934 for a free initial consultation.
There’s no way around it: divorce is stressful. During this often ugly process the soon to be ex-spouses battle it out and in the end arrive at a division of property and debt that they both agree upon. It is on the assumption that this hard-won agreement represents the last word on their personal liability for martial debts that most people depend. Sadly, these agreements are not worth very much when the obligor’s finances deteriorate.
Joint and Several Liability
Whether or not your ex-spouse agreed to be solely responsible for an SBA Debt, if both spouses were guarantors on the SBA loan, then the SBA has a right to pursue either spouse for the full amount of the outstanding debt; this sad fact is a result of what is referred to as joint and several liability. And, although the SBA can only collect the full amount of the debt once, both ex-spouses remain guarantors on the original debt — that is, unless one of them settles with the SBA first.
That Hard-Won Agreement with your Ex-Spouse is Not Binding on your Creditors
The simple fact is that you divorced your husband/wife, not your creditors; they were not parties to your divorce and had no say in your agreement. Therefore, agree all you like with your ex-spouse, if he or she fails to pay off the full balance of the remaining SBA debt, you will be asked to do so. In many instances, years can pass before the SBA gets around to sending a 60-day Notice Letter making the event all the more traumatic with many a person prone to ignore it. But, it would be a grave mistake to ignore this notice — it may well be the only opportunity for you to settle the debt on reasonable terms before it is transferred to the U.S. Treasury where settlement terms are harsh and deals few and far between.
The financial collapse of a family business can often lead to divorce. Work out a realistic plan to address the SBA debt or the U.S. Treasury will ultimately work one out fore you.
Forewarned is forearmed.