Options for Debt Forgiveness Through SBA 7(a) and 504 Loan Programs

The SBA (Small Business Administration) offers two major loan programs to help small businesses get access to capital – the 7(a) loan program and the 504 loan program. These programs provide government-backed loans to qualifying small businesses, which can be easier to obtain than regular bank loans.

A common question that borrowers have is whether there are any options for debt forgiveness with these SBA loans. The short answer is yes, there are some possibilities for debt forgiveness, but they are fairly limited compared to, say, the PPP loans from 2020 which had more robust forgiveness options.

In this article, we’ll break down the possibilities for debt forgiveness with 7(a) and 504 loans, discuss what business owners need to do to qualify, look at the pros and cons, and link to other helpful resources.

7(a) Loan Forgiveness Possibilities

The 7(a) loan program is the SBA’s main lending program for small businesses. It includes several different loan types like 7(a) term loans, lines of credit, SBA Express loans, export loans, etc. Over 90% of SBA loans are made through this program.

So what about 7(a) loan forgiveness? There are a couple possibilities:

SBA Debt Relief for COVID-19 Impacts

During the COVID pandemic, the SBA offered some 7(a) borrowers debt relief by making 6 months worth of loan payments for them. This applied to loans that were in “regular servicing” status as of March 27, 2020. Borrowers had to request the relief from their lenders. [1]

This COVID debt relief program ended on September 27, 2021, so it is no longer active. But it does show a precedent of the SBA providing some limited debt forgiveness previously.

Refi into PPP Loans

During 2020-2021 when the Paycheck Protection Program was running, some 7(a) borrowers were able to refinance their loans into PPP loans. Since PPP loans had more generous forgiveness terms, this allowed them access to more substantial forgiveness.

Of course, new PPP loans are no longer being issued, so this is no longer an option. But 7(a) borrowers who took advantage of it did benefit at the time.

Hardship Provisions

The SBA does have certain “hardship provisions” that lenders can apply in cases when 7(a) borrowers are facing financial difficulties in repaying. This could include things like deferring payments or reducing installments.

While this falls short of actual loan forgiveness, it can provide some temporary relief in cases of true hardship. Borrowers have to demonstrate real inability to repay though, so the hardship standards are quite strict.

504 Loan Forgiveness Options

The 504 loan program provides long-term, fixed-rate financing for major assets like real estate or equipment. The loans are issued through Certified Development Companies (CDCs), which are nonprofit lenders who partner with the SBA.

Forgiveness options for 504 loans are also quite limited:

Refi into PPP

As with 7(a) loans, during 2020-2021 some 504 borrowers did refinance into PPP loans in order to access more substantial forgiveness. But new PPP loans are no longer being issued.

Debenture Redemption

In some cases, a 504 loan can be paid off early through “debenture redemption.” This involves the small business owner essentially buying back the loan and paying it off before maturity.

Debenture redemption can be used strategically in scenarios when business owners have excess cash they want to deploy or if they are selling/transferring ownership of the business.

So while not outright forgiveness, paying off the loan early does eliminate the remaining interest and principal payments.

Hardship Provisions

As with 7(a) loans, 504 lenders can provide some hardship assistance for borrowers facing financial difficulties. This may include things like payment deferrals or reamortization of the loan.

But the borrower has to clearly demonstrate true inability to pay, so the hardship standards are strict. And it falls short of actual forgiveness.

The Pros and Cons of Pursuing SBA Loan Forgiveness

As we’ve seen, options for outright debt forgiveness are limited with 7(a) and 504 loans. The few possibilities that exist come with plenty of caveats. So business owners need to carefully weigh the pros and cons when considering forgiveness.

Pros

• Alleviates financial burden of monthly payments
• Frees up cash flow for other business needs
• Can improve chances of qualification for future financing
• Peace of mind of debt eliminated

Cons

• Strict eligibility standards for hardship assistance
• Refinancing not always accessible
• Tax implications – cancelled debt may count as taxable income
• Potential impact on future SBA loan applications
• Application documentation is cumbersome

As with most major business financing decisions, it’s smart to have an in-depth discussion with both your lender and accounting advisor before pursuing any forgiveness plans. Make sure you understand all the implications clearly.

Other Helpful Resources

If you are an SBA borrower interested in learning more about forgiveness options or other debt relief strategies, here are some other helpful government resources:

• SBA COVID-19 Relief Options
• SBA Debt Relief Information
• PPP Loan Forgiveness Information
• 7(a) Loan Program Details
• 504 Loan Program Details

The SBA also funds various Small Business Development Centers nationally that provide free counseling and advice to business owners. You can locate your nearest SBDC here.

In Summary…

While the possibilities for outright debt forgiveness are limited, SBA 7(a) and 504 borrowers struggling to make payments do have some options to seek relief:

• COVID-19 debt relief (no longer active)
• Refinancing into PPP (no longer active)
• Debenture redemption (504 loans only)
• Hardship assistance provisions

But eligibility hurdles are high and tax/future financing implications need consideration too. So have in-depth discussions with both your lender and accountant before pursuing any forgiveness plans.

I hope this overview gives a helpful high-level understanding of SBA loan forgiveness options and things small business owners should consider. Let me know if you have any other questions!