Question. I have an SBA loan. Won’t the Government Guarantee Pay Off the Loan?

Answer.The Small Business Administration (SBA) helps small businesses and entrepreneurs obtain loans. One of the ways it does so is by guaranteeing the loan so that the lender is insulated from the risk of loss. For standard 7(a) loans, the guaranty is for 85 percent of loans up to $150,000 and 75 percent of loans greater than $150,000. The maximum standard loan is $5 million. Many borrowers erroneously believe that in the event of a default they will be protected by the SBA guarantee and that their exposure will be limited to 15-25 percent of the remaining balance on the loan. Nothing could be further from the truth. The SBA guarantee is provided solely for the lender’s protection and to encourage loan origination by protecting the lender in the event of default, not the borrower.

If you default under your SBA loan, expect the business to be closed and all of the collateral pledged by the business to be liquidated as quickly as possible. However, after this occurs if any shortfall remains, expect a letter from the lender inquiring about the personal guarantee and making demand for full payment of all outstanding amounts due and owing on the SBA loan. Once this letter is received, it is best to immediately speak to legal counsel about working with your lender to reach a settlement under the SBA Offer in Compromise program, if you are trying avoid a lawsuit, foreclosure action or referral to the U.S. Treasury for enforced collection under the U.S. Treaasury Offset Program (TOP).