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SBA LIEN RELEASE FOR CONSIDERATION

The Small Business Administration (SBA) often takes collateral when making loans to small businesses. This collateral acts as security for the loan in case the borrower defaults. The SBA commonly takes real estate as collateral by placing a lien against the property. If the borrower pays off the loan as agreed, the SBA will release the lien so the borrower has clear title to the property again. However, sometimes a borrower wants the SBA to release its lien even before the loan is fully paid off. This is called an SBA lien release for consideration.

What is Consideration?

Consideration refers to something of value being exchanged for the lien release. It could be a lump sum payment, additional collateral, or restructured loan terms that benefit the SBA. The consideration demonstrates good faith on the borrower’s part and gives the SBA an incentive to release its lien before being fully repaid.

Why Would a Borrower Seek a Lien Release?

There are a few common reasons a borrower may request an early SBA lien release:

• The borrower wants to sell or refinance the collateral property but cannot due to the SBA lien.
• The borrower is struggling to make payments and wants to restructure the loan terms. They may offer additional collateral or altered payments to persuade the SBA to release its lien on part of the collateral.
• The property has appreciated significantly, and the borrower wants to take out equity. The SBA may release its lien in exchange for a lump sum payment less than the full loan balance.
• The borrower wants to use the collateral property in another loan but cannot due to the SBA lien. So they request a release in order to free up the equity.

What Factors Does the SBA Consider?

The SBA will consider several factors when deciding whether to grant an early lien release:

• Loan Status: Borrowers still early in their loan term are less likely to get a release than those near full repayment.
• Equity in Collateral: If the property value exceeds the SBA loan balance by a sizable margin, a partial release may make sense.
• Additional Collateral: If the borrower pledges other valuable assets as additional security, it improves their chances.
• Loan Guarantees: Personal or business guarantees on the loan strengthen the SBA’s position and make an early release more palatable.
• Restructured Loan Terms: If the borrower makes concessions like higher payments, that can offset the risks of an early lien release.
• Borrower’s Financial Position: Strong revenues, profits, and cash flow for the business make it easier for the SBA to release its collateral position.
• Credit History: Borrowers with excellent credit and a history of timely payments are viewed more favorably than those with poor credit or delays.
• Purpose of the Release: If the reason aligns with the SBA’s goals like business growth and job creation, that helps the case.

The stronger the borrower looks by these metrics, the better their chances the SBA will agree to an early lien release in return for reasonable consideration.

What is the Lien Release Process?

If the borrower has paid down the loan significantly or can provide substantive consideration, here are the steps to request and obtain an SBA lien release:

1. Contact the SBA loan servicing office and explain the rationale for wanting a lien release. Provide supporting documents like appraisals, financial statements, and details on consideration you will offer.
2. The SBA will analyze your request against the factors above and perform due diligence on current collateral value.
3. You will receive either a tentative approval letter or denial from the SBA outlining their decision.
4. If approved, you can negotiate specific consideration and finalize loan modification or payment terms. Get any agreement in writing.
5. The SBA will prepare a lien release document to be filed with the appropriate real estate records office.
6. You pay any agreed upon consideration.
7. The SBA executes and files the lien release, removing the collateral property from their secured interest in the loan.
8. You receive a filed copy of the release and may now sell, refinance, or take other action on the property unencumbered by the previous SBA lien.

Things to Remember

Some key points to remember about the SBA lien release process:

• Seek professional advice from an attorney, accountant, or SBA specialist if unsure how to approach this.
• The release process takes significant time so plan accordingly. It can be several months from initial request to final approval.
• The SBA will not put their loan collateral at risk without appropriate offsets and protections in return. Be reasonable in negotiations.
• Do not close on selling, refinancing, or taking equity out of the collateral property until you have a completed SBA lien release in hand.
• An SBA release does not terminate your obligations under the loan itself. You must still make payments and comply with loan terms.
• If your business or financial conditions deteriorate after getting a release, the SBA may demand new collateral or loan modifications.

With careful planning and a compelling case, securing an SBA lien release for consideration can be an effective way to regain control of your collateral for business needs or exit strategies. But understanding the process, risks, and factors involved is critical to achieving the desired outcome.