Seeking guidance from SBA lending experts

searcher profile

May 28, 2024

by a searcher from University of California, Berkeley in Vienna, VA 22180, USA

I have a deal under contract and am considering an SBA loan. The issue is my business partner will be providing half of the capital needed for the transaction but while their credit is good they have defaulted on an SBA loan after their business failed during the pandemic. I'm interested in learning if there is a way to make this work. If they cannot be on the loan we may have to be creative in them being an employee and once the loan is repaid they purchase 50% of the company for $1, or something to that effect. There is also the issue of seasoning and source of funds that will be used for the downpayment. Appreciate any insights!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
^redacted‌ thank you for tagging me. I would be happy to jump on a call to see if we can find a way to make something work. But for the sake of the rest of the community, the partner would not be able to have any ownership interest at all. The fact they have defaulted before will come back on a search and kill the deal. Getting their equity into the transaction is going to be a problem. Unless they gift you the funds, I do not know how else you could justify cash coming from them, and a large gift a lender will likely want an explanation for if they are not family. If you make them a key employee, the issue could also come up. So you would not want them involved at all at time of closing.

If they previously defaulted on an SBA loan and the SBA incurred a loss, then they could reach out to the SBA and agree to payoff that loss. If they pay what the SBA lost on the transaction, they would become eligible for SBA financing again. I have had clients that experienced losses many years ago do this and they were then eligible for SBA financing again.

Just so everyone is aware, an offer and compromise with the SBA does not resolve SBA eligibility unless that compromise fully satisfies the loan. If there is an offer and compromise and the SBA still takes a loss (pays out on their government guarantee), that loss is then on the record with the SBA and even though you did an offer & compromise, you are still not eligible to borrow from the SBA going forward. You would need to payoff that loss to be eligible again.

I hope this helps. You can reach me at redacted if you would like to discuss further.
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Reply by an intermediary
from Creighton University in Los Angeles, CA, USA
It can be challenging to obtain an SBA loan if one of the partners has previously defaulted on an SBA loan. However, there are a few potential options to explore:

1. Offer in Compromise (OIC): Your business partner can apply for an SBA Offer in Compromise, which allows them to settle the defaulted loan for less than the full outstanding balance. If the OIC is accepted, it may clear the way for them to be involved in a new SBA loan application. However, the approval process for an OIC can be lengthy and there's no guarantee it will be accepted. 2. Exclude the defaulted partner from the loan application: As you mentioned, one option is to exclude your partner from the SBA loan application and have them join the business later as an employee or investor once the loan is repaid. This would require structuring the deal creatively, potentially having your partner provide their capital contribution as an equity investment rather than part of the down payment.

For context, I co-founded Dealwise to be the easiest and fastest way to get an SBA loan for a business acquisition. In a nutshell, we connect borrowers and SBA 7(a) lenders, functioning as an automated loan broker. We can help you out. Feel free to check out our website. [https://godealwise.com/beacon]
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