Getting Relief from a Defaulted SBA Loan for a Failed Small Business

Getting Relief from a Defaulted SBA Loan for a Failed Small Business

Starting and running a small business is tough. Like, really tough. You have to wear a hundred different hats, work crazy hours, and risk everything on an idea you believe in. So when that business fails despite your blood, sweat, and tears, it can feel incredibly defeating and unfair.

If you took out a loan from the Small Business Administration (SBA) to help launch or grow your business, defaulting on that loan can make an already difficult situation feel downright hopeless. The good news is that you may have options to find relief, even if your business didn’t make it. This article will walk through some of those options so you can get back on your feet.

First Things First: Communication Is Key

Before doing anything else, reach out to your SBA loan servicer directly. Let them know you are struggling to make payments and want to discuss options. The earlier you open up communication, the more likely you are to find a solution.

The SBA has something called loan “workouts” designed to help borrowers who default on their loans. But your servicer can’t help you if they don’t know you need it. So don’t avoid them out of fear or embarrassment – that will only make things worse in the long run.

Get Organized

Next, pull together documentation about your finances and the situation with your business. This includes tax returns, financial statements, business records, and anything else related to the struggles you’ve faced.

Why? Because the SBA will need to verify details about your ability to repay the loan in order to approve any kind of relief. Having clear records will also help you make your case.

Consider Your Relief Options

There are a few ways the SBA provides relief for defaulted loans, including:

• Deferment – Temporarily postponing payments for a certain period of time. This can give you breathing room to improve your financial situation.
• Forbearance – Reducing or suspending payments for up to 5 years. Interest still accrues, but this can help in the short-term.
• Loan Modification – Making permanent changes to the original loan terms, like extending the repayment period, reducing the interest rate, or postponing principal payments. This makes the loan more affordable.
• Partial Settlement – The SBA agrees to let you pay a portion of the loan balance as full settlement. This forgives the remaining debt.

Which option is best depends on factors like how long you need relief, your current and future ability to repay, whether you have collateral to secure the debt, and the initial terms of your loan.

Be ready to explain why a particular option makes the most sense for your situation. Having details about your finances and business struggles will back up your case.

Submit Your Relief Request

To formally request relief from your SBA loan, you need to submit SBA Form 1150. This “loan workout request” will ask for:

• The specifics of your relief request
• Personal and business financial information
• Explanations and documentation for why you defaulted
• Your plan for future repayment ability

It seems like a lot of paperwork, but having everything clearly outlined makes it easier for the SBA to review and hopefully approve your request.

You can submit Form 1150 directly to your servicer. Be responsive to any additional questions or requests for documentation as your relief request is processed.

Know It Can Take Time

It’s important to understand that getting approval for an SBA loan workout takes time – often 45-60 days. The agency needs to thoroughly review your request and financial situation before agreeing to relief options.

This process can be frustratingly slow when you are facing default. But try to be patient and stay on top of communication with your servicer so you know where things stand.

Consider Other Options Too

In addition to the SBA relief programs, here are a few other potential options to deal with a defaulted loan:

• Refinancing or Consolidating Debt – If you have good credit and collateral, you may be able to work with a private lender to refinance or consolidate debts into a new loan with better terms. This can simplify payments.
• Payment Plans – Your servicer may allow you to repay the defaulted amount over an extended period in addition to your regular monthly payments.
• Settlement – In some cases, lenders may agree to settle a defaulted loan for less than the full balance if you can pay a portion in a lump sum. This can forgive part of what you owe.
• Bankruptcy – As an absolute last resort, filing Chapter 7 or Chapter 13 bankruptcy would eliminate or restructure your SBA loan debt along with other financial obligations. This damages your credit but gives you a fresh start.

Don’t Give Up Hope

Even if your small business didn’t make it, you still deserve a second chance at financial stability. Defaulting on an SBA loan feels lousy, but staying in communication with your servicer, understanding all your options, and advocating for yourself can help turn things around.

With time and commitment to getting back on track with your loan, you can move forward and rebuild. Don’t be afraid to ask for help – it exists for situations just like this. And don’t give up hope on finding relief. Take it step by step, be patient, and know there are people ready to assist you.

You had the courage to bet on your business idea in the first place. Now have courage to make this situation right so you can free yourself from default and look ahead to brighter days. You’ve got this!