Congress established the CARES Act during the epidemic, which featured the Paycheck Protection Program—a special COVID-19 assistance initiative. It provided qualified small businesses with forgiven loans. Ultimately, PPP loan forgiveness was available to almost eleven million enterprises.
Other programs included the Restaurant Revitalization Fund (RRF), which provided funds to assist restaurants and other businesses in remaining open, the Shuttered Venue Operators Grant, which provided provides to theaters and similar organizations, and the EIDL grant program, which offered grants that did not need to be repaid. It was also not necessary to repay these monies.
If you’re a company owner facing financial difficulties, you might be wondering if there are any alternative small business loans available besides PPP loans, and if not, what would happen if you are unable to make payments.
In this section, we’ll go over what happens to business debt defaults, when small business debts might be forgiven, and what options you have if you need assistance paying off small business debt.
What Makes A Business Loan Eligible For Forgiveness?
Here, we’ll go over what happens to business debt defaults, when small business debts can be forgiven, and what to do if you need assistance. Loan forgiveness is typically not an easy operation to apply for and obtain unless it is part of the PPP loan program, which includes special procedures.
Rather, a creditor will typically try to gather, and if it is unsuccessful, it may ultimately choose to write off the debt—that is, to forgive it implicitly.
What increases the likelihood of a debt being forgiven? A lender might stop pursuing the collection of a loan if there is:
- No individual assurance: This implies that the lender is unable to pursue collection efforts using the debtor’s assets or income.
- Not a security: The debt is not secured by any collateral. The lender usually files a UCC lien when that occurs. To discover out, you may verify your business credit.)
- Either there are too many creditors with an important interest in the business’s assets, or there are no significant holdings from which to collect.
The debt amount is also important. Even tiny debts might be offered to collection agencies, who might then attempt to collect, but smaller debts might simply not be worthwhile to pursue.
It is uncommon for creditors to formally waive a debt. Frequently, they cease gathering after a while. The business operator who defaulted is therefore uncertain about what will happen next. They might believe that “no news is good news,” but they might also be curious as to whether or not they would ever hear from a collection agency.
It should be noted that a personal guarantee is typically attached to small business credit cards, meaning the lender may attempt to gather from the cardholder rather than merely the company.
What Happens If I Default on an SBA Loan?
SBA loans are returned, except loans provided during the pandemic through the Paycheck Protection Program. For other existing SBA loan kinds, such as microloans, 7(a), Economic Injury Disaster Loans (EIDL), and other loan types, there is no forgiveness program.
U.S. Small Business Administration loans are normally nonexistent, except Disaster Relief loans. Rather, banking institutions make them, and the SBA backs them. The purpose of the SBA guarantee is to safeguard lenders, not borrowers. The lender of another kind of SBA loan will try to get money from you if you fail to make payments. If they don’t work, there can be more collection efforts taken against you.
Anybody who manages at least 20% of the business must provide an unrestricted personal guarantee for the majority of SBA loans. Additionally, the Treasury Department of the United States may have collection measures that other borrowers do not, such as the ability to garnish wages or intercept tax returns, because these loans are legally guaranteed obligations.
Small company owners may be allowed to settle their SBA loans by making a partial payment using an Offer in Compromise.
Which SBA loans are forgivable: PPP, EIDL, and 7(a) Loans
- Paycheck Protection Program loans
A pandemic-era SBA loan program was called Paycheck Protection Program (PPP). PPP loans were intended to be distributed via around 5,500 lenders nationwide. This loan was intended to give small firms a means of maintaining payroll stability and preventing employee layoffs.
Loans for PPPs could total up to $10 million. The amount for which you qualified was determined by the payroll expenses incurred by your company.
For example, sole proprietors were limited to an income limitation of $100,000 and could only deduct 2.5 months’ worth of compensation. Therefore, you could only pay an employee for 2.5 months of wages, as if they were making $100,000, regardless of their actual income.
At a one percent interest rate, PPP loans were effectively interest-free. These were originally two-year loans, but based on when your loan was approved, they may have subsequently been converted to five-year loans. They didn’t need a personal guarantee, and no collateral was needed. If the employee retaining requirements were satisfied and the money was spent for approved costs, then these loans are fully forgiven.
On May 31, 2021, the Paycheck Protection Program came to an end. If you currently owe money on a loan, you may be able to petition for loan forgiveness up until the loan’s maturity date.
Bottom Line:
If the staff retention requirements are satisfied and the money is utilized for approved expenses, PPP loans are fully repaid.
- Economic Injury Disaster loans
Economic Injury Disaster Loans (EIDLs) are different from PPP loans. The purpose of the EIDL is to satisfy financial obligations and operating expenses that could have been met had the disaster not occurred. For example, if you owned a restaurant, and your business got shut down due to your state’s COVID restrictions, an EIDL potentially could help you cover things like rent and working capital.
While the SBA stopped accepting applications for new COVID-19 EIDLs on Jan.1, 2022 and ceased loan increase requests and reconsiderations for declined applications as of May 6, 2022, you can still apply for a non-Covid EIDL relief loan. The rates on these are up to 4 percent.
Regarding other SBA loan categories, the EIDL is unique in that it has a 30-year repayment period. The extra 20 years to pay off debt would result in comparatively inexpensive payments, especially considering the low interest rate.
Differences from the PPP loan
Collateral is needed for any loan over $25,000 if you obtained an EIDL. For example, if you were a restaurant owner and you took out a $50,000 EIDL, you would have to put your company assets up as collateral.
One other significant distinction is that you would have personally guaranteed it if your EIDL was more than $200,000. You are personally accountable for the debt if your company closes down the next week.
EIDLs cannot be excused. Although you can pay off your loan early without incurring penalties, you must repay them throughout the 30 years.
Were you aware? EIDL loans have a 30-year repayment period and are not repaid.
- SBA ‘Offer In Compromise’ basics
Generally speaking, SBA 7(a), Express, and 504 loans are subject to the OIC procedure. Although an OIC process exists for disaster loans, it is managed by a separate SBA office. The most common SBA loan, the 7(a), is discussed in this section.
The SBA needs you to provide evidence of your inability to repay the loan and your current financial hardship to obtain an OIC. This implies you are only able to pay them a percentage of what you owe them and don’t have the money to give them back in full.
The company must shut down for your company to be qualified for a settlement.This indicates that you are no longer taking on customers or making goods. The business cannot continue to run even if you collected on some final debts or finished some projects before your offer in compromise.
Until you expressly make an additional offering for the business entity, the OIC is often solely for the guarantor. The legal body that controls your company would still be responsible for the debt even if your OIC was approved. Thus, in that sense, the guarantor is merely being released in return for a monetary payment; the obligation is not being entirely forgiven.
The paperwork needed in submitting an OIC is far greater than that of asking for relief via a PPP loan. To demonstrate that you are unable to pay off this obligation in full, you will need to produce bank statements, pay stubs, tax returns, and personal financial documents.
Another distinction between the OIC and the PPP loan is that the former needs to evaluate and approve the latter before it can be submitted to the SBA. It won’t be submitted to the SBA if your lender rejects the terms you’re offering.
Compare that to a PPP loan, when all you need to do is provide the lender with your application. They might have checked it for accuracy, but the SBA received it after that. There was a brief form for small PPP loans that you had to fill out to apply for forgiveness.
PPP debt forgiveness will be seen by lenders very differently from the SBA OIC. This is because SBA reimbursement for PPP loans is 100%, but SBA reimbursement for 7(a) loans is usually at 75%.
This implies that on any sum forgiven via the OIC program, the bank will suffer a loss of twenty-five percent. Because of this, the bank will assess the loan far more carefully than the PPP loan because it has a financial stake in the outcome.
Who Needs SBA Loan Forgiveness?
Not every company that obtains an SBA loan is successful. You should think about SBA loan forgiveness if you discover that your company is losing money and you are delinquent on your SBA loan.
Approximately ten days after you miss your first payment, your lender will probably send you a late notice. If you can make a payment, be prepared for an additional cost as most lenders impose a late fee. Since not every borrower will notify you when a payment is missed, try to keep track of your payments.
The lender will first make efforts to gather information from the borrower before reaching out to the SBA.
Certain lenders might try to renegotiate the SBA loan or devise an alternative repayment schedule. They could provide a full debt restructure or interest-only payments for a brief period. This is not regarded as a loan default.
Only companies who genuinely miss payments on their SBA loans are eligible to request loan forgiveness. Recognize that you can miss payments on a loan despite going into default. This occurs when you break any of the loan’s terms, such as:
- Acquiring more debt
- Without contacting the lender to get permission before adding more stock
- Not submitting annual tax filings for the duration of the loan
- More often than not, loan default brought on by nonpayment is the result of breaking the conditions of the loan arrangement.
How Does the SBA Loan Forgiveness Program Work?
Owners of businesses that are in arrears on their SBA loans may petition for loan forgiveness, but there is no assurance that the request will be granted by the SBA. The term “offer in compromise” is used more frequently to describe it.
After reviewing your case, the SBA speaks with the lender about the situation. Only after the lender has attempted and failed to collect on the delinquent loan may the SBA act. After buying back 50–85% of the loan, the SBA goes after the company to collect the remaining balance.
The SBA will be dependent on you to repay the loan as you are the personal guarantor. As part of a proposal in compromise, you may propose a partial payment if you can pay back the loan in full.
As the personal guarantor, the SBA will be depending on you to repay the loan. You can make an offer in compromise, offering to pay back a portion of the loan, if you are unable to repay the entire amount owed. The SBA may decide to approve or disapprove your request.
The SBA has the right to take company property from the personal guarantee if you are unable to repay or choose not to. Any owner holding more than 20% of the company’s stock would have been obligated to sign as a guarantor.
How Does the SBA Collect Debt?
The SBA has two options for obtaining the money it is owed. Either by cross-servicing or the Treasury Offset Program (TOP).
Through the firm or guarantor’s income tax refund, the Treasury Offset Program (TOP) collects the debt. The money is automatically allocated to the SBA defaulted loan obligation rather than being returned as anticipated in the form of a tax refund.
Cross-servicing is the process by which the SBA transfers past-due loans to the Bureau of Fiscal Service of the U.S. Department of Treasury. To recover the loan, they will:
- Writing letters for debt collection
- Engaging a private debt recovery agent
- Getting paid
- Making payment arrangements on your own
- Notifying the main credit reporting agencies
- Applying to the Office of the Department of Justice
To steer clear of these uncomfortable choices, it is preferable to make the largest offer possible at the outset of SBA loan settlement talks.
Are There Any Drawbacks to SBA Loan Forgiveness?
Anything that helps when your company is collapsing and you’re drowning in debt feels like a miracle. If you require loan forgiveness and are unable to refinance your SBA loan, be aware that there are certain disadvantages.
- You must first completely dissolve your company and sell off all of its assets. This contributes to reducing the total amount of debt.
- Second, understand that requesting the forgiveness of an SBA loan will hurt your company’s credit history. If you endorsed the defaulted SBA loan, it may also hurt your credit.
- Lastly, it will be much harder for business owners who obtain loan forgiveness from the SBA to subsequently be authorized for federally backed business financing.
How To Increase Your Chances of Loan Forgiveness?
Cash flow problems are a regular occurrence for small firms, which can make loan repayment challenging. This is part of the original intent behind the SBA loan program, which is to provide otherwise highly variable loan candidates with an equal opportunity to obtain the funding they need to expand and thrive. However, the first thing a business owner should do if their company is simply unable to make its payments is to take proactive measures with their lender.
Take note:
The trick is to communicate. When you are in jeopardy of falling behind on your payments, it is usually important to speak with your lender as soon as possible. To assist you in repaying the loan, certain lenders may decide to rearrange your payment schedule or waive late fees even after the specified grace period.
CONCLUSION
Although it’s difficult to get, SBA loan forgiveness is achievable. To be successful with the OIC process, one must know what is and is not negotiable. Their rules apply; it’s their game. You can’t just grab your ball and go back if you wish to settle, therefore make sure you are aware of all the intricacies involved in the process, or locate someone who is.