SBA Bankruptcy stories

investor profile

April 24, 2023

by an investor from University of California, San Diego in San Diego, CA, USA

Does anyone know of a repository of stories of people that have failed to repay their SBA loans and gone bankrupt? I heard a statistic that 10% of these loans go bad, what happens in those cases? What are the mistakes that the searcher/owners made? How can they be prevented?

I see many stories of success, but I feel like I could learn a lot more from reading or hearing stories of failure.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
It is very hard to provide you with data on failed loans in the SBA world as most SBA 7A loans have 10 year terms and many are still performing. From 2010 to 2020 there were roughly 588,000 SBA 7A loans made. Over the same time period there were 12,520 SBA 7A loans charged off - meaning not paid in full. That would represent a failure rate of 2.1% of all loans made. That does not mean there were not other businesses that failed, but in those other cases the SBA did not report a loss on the loans. There are also other loans still performing at the end of 2020 that might fail in the future. So the percentage of 2.1% is likely on the low side. However, I also believe a 10% failure rate is on the high side as well.

If your SBA loan goes bad, the first thing that happens is the Bank liquidates the collateral. It is in your best interest to work with the Bank through the process of liquidating the business. Whether that is you assisting in selling the business, selling inventory, collecting on accounts receivable, etc. The more involved you are the more value that will likely be received during liquidation. Also, the more help you provide the more likely your Bank will cooperate with you post liquidation. Whatever shortfall exists once the loan is liquidated is technically your responsibility under your personal guarantee. If you have put up your home as additional collateral, the exposure now exists to your home as well as you personally.

You do have the option to present the Bank and SBA with an "Offer & Compromise" during the workout period or post liquidation. We would recommend submitting it as part of the work-out / liquidation plan. Under this plan you can provide updated personal financial information and offer a plan or settlement for your guarantee. You might even be able to make a payment and negotiate a release of your home or a release of your remaining guarantee on the loan. By doing this you can get out from the loan but if the SBA suffers a loss it will prevent you from being able to borrow from any government programs in the future unless you cure the loss at a later date. However, there is no guarantee the Bank and/or SBA will accept a settlement. If you have $500,000 in equity in your home or large cash accounts and only offer to pay $50,000 in the "Offer & Compromise" it likely will not be accepted. The offer has to be reasonable and if you have not cooperated with a lender they might pursue you no matter what. But keep in mind, unless you have assets worth pursuing, it is not cheap to pursue someone under a personal guarantee and even foreclosing on a second or third mortgage is not cheap and the Bank and SBA would want to be sure there is real equity there.

The other option you have is to file a personal bankruptcy.. If your house is tied into the deal you might be able to save it in bankruptcy if the debt well exceeds the value, but then if there is value you might not be able to do. But the bankruptcy might force a negotiation with the SBA to settle the house out.

I hope this information is helpful. I know business owners that have failed. Some have had to make the SBA whole. However, if you were to do any other small business loan a personal guarantee would likely be required by a Bank as well, and I know way more horror stories from conventional business loans forcing people into bankruptcy then I have heard on SBA loans over my career. With SBA loans the Bank gets most of the money back via liquidation or via the SBA guarantee, whereas on conventional bank loans the Bank has exposure to the full loss. Happy to discuss in more detail at any time at redacted Thank you and have a great day!
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Reply by a searcher
from University of Pennsylvania in New York, NY, USA
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