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Selling your Business after an SBA Loan Default

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 a 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 your business assets to a buyer without first obtaining bank approval, 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.

Applying for an SBA Loan with a Felony in your Background: You Better Understand SBA Form 912

Character Counts

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.

Will a criminal record prevent me from getting an SBA loan or modifying one?

That depends. There are indeed eligibility factors for financial assistance based on the activities of the owners and the historical operation of the business. As such, the business cannot have been:

(a) a business that caused the government to have incurred a loss related to a prior business debt;

(b) a business owned 20 percent or more by a person associated with a different business that caused the government to have incurred a loss related to a prior business debt; or

(c) a business owned 20 percent or more by a person who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral depravity.

If you are having trouble with your SBA loan and are unsure whether your past or present actions might disqualify you from further participation in SBA programs, call one of the attorneys at the Perliski Law Group for a free initial consultation (214) 446-3934 or use the Contact Us form on our site.