What happens when an SBA-backed business goes bankrupt?

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May 08, 2025

by a searcher from University of California, Berkeley in Los Angeles, CA, USA

It's rare, but what happens to an SBA-financed business when a buyer declares bankruptcy? The underwriting bank will seize the business and exercise their claim over the buyer's personal assets, sure, but how / where does the bank re-sell the business, likely for pennies on the dollar? Seems like there's opportunity to scoop up distressed assets on the low, polish a bit, and then flip or hold. Curious if anyone has experience in this area.
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. In addition to be being a Commercial Loan Broker we also have a Bank Consulting division as well, so we have a lot of experience related to the work-out side as well. Typically speaking, at the point an SBA loan goes bad there typically is not a lot of value left in the business. The best thing the owner can try to do is sell it to someone else, even if for less than the debt, and then work out a deal with the Bank. However, if that does not happen and the Bank starts the liquidation process, often the Bank is going to just liquidate the assets, collect what they can, collect on the guarantee, and move on. The Bank will also liquidate any personal real estate held at this point unless a deal is cut to get it released. It is rare to see small businesses go into bankruptcy. The reason why is that corporate bankruptcy is very expensive. I usually hear the price tag is $50,000 to $100,000. For small businesses already in trouble, often they do not have the money to file for bankruptcy. Even if they do, you are only going to throw that type of money on it if you really think you can turn it around. Buying a business out of bankruptcy requires the creditors to agree to the sale. It also usually requires the Borrower to agree to the sale, and often they do not want to do that if they are still on the hook for part of the loan. Although it is a great concept, there are not typically many corporate bankruptcies from my experience in the SBA world. Most businesses get liquidated out and not sold. Even if you get a seller with a potential buyer for their struggling business, the SBA and lender still need to approve the sale if the loan is not getting fully covered, and if they think they can recover more liquidating the business, they likely will go that route instead. Happy to answer any questions anyone has on how this process works. You can reach me here or directly at redacted
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Reply by a searcher
from University of California, Los Angeles in Marina del Rey, CA, USA
They hire a firm dedicated to appraising the assets and liquidating it in auctions or through their contacts. Companies like Gordon Brothers specialize in this https://www.gordonbrothers.com/ I worked in commercial finance as a senior lender for 7+ years, and we worked alongside SBA firms. This is what we did in those bankruptcy situations where the only collateral was the assets. Sometimes we required these firms like Gordon Brothers to appraise the assets as a condition of the loan. The appraisals are based on NOLV (net orderly liquidation valuations), not enterprise valuation. This was to give us guidance how much it would be worth in bankruptcy liquidation situation.
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