Business with SBA loan and ongoing lawsuit

October 24, 2025

by a searcher in Illinois, USA

The seller has an SBA loan and is currently looking to settle a lawsuit. He wants to know whether he needs to obtain approval from his SBA lender before finalizing any settlement with the plaintiff. My question is: should he have already informed his lender about the lawsuit? And if not, does this omission constitute a violation of the loan’s negative covenants? I am new to this, so what obligations as owner has towards SBA lender or SBA if business is under a lawsuit ?

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Reply by a professional
from Columbia University in Oakland, CA, USA

Not legal advice and I haven't seen the docs, of course, but in my experience, most 7(a) loan docs provide for an event of default at the lender's election for material civil or criminal litigation as well as an affirmative covenant to notify the lender of litigation that might substantially or adversely affect the business (which would trigger an incipient event of default, if not noticed). Depending on what the settlement entails, especially how amounts are funded, performance under the settlement agreement might involve disposing of pledged collateral (e.g., amounts in deposit accounts) outside the ordinary course of business -- which is also a breach of most SBA loan agreements and could again create an incipient event of default. So, again not legal advice, but wise for the company, independent of M&A considerations, to give the bank notice of the lawsuit and get consent to any disposition of collateral related to settlement agreement performance. Or if those steps have been missed, to obtain a waiver from the lender related to the same. All that being said, this may all be a non-issue if the SBA loan is being refinanced out in connection with a sale of the business.

Reply by a professional
from University of Alabama at Birmingham in Florida, USA

Agree with the others that this is really fact-intensive. Whether notice or approval is required depends on the specific loan docs and how “material litigation” is defined. Also depends on deal type in an asset sale the lender and lawsuit generally stay with the seller, while in a stock sale they don’t. Finally, the lender’s position (first vs. second lien, SBA or otherwise) can make a difference if any settlement funds touch business assets. Definitely something to flag for counsel during diligence, but not necessarily a deal-breaker on its own. Please feel free to reach out @ redacted or DM here if you’d like to discuss in more detail.

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