October 21, 2024
Adam Hoeksema
I've spent over a decade as an SBA lender, and one of the toughest questions I get is, "What happens if I can't pay back my loan?" There are times when, despite a borrower’s best efforts, circumstances make it impossible to stay current on payments.
To be clear, my advice is always to repay your loan if you're able to. It’s the right thing to do. But I also recognize that life can bring unexpected challenges, whether it’s a downturn in business or personal hardships, that might make it difficult to keep up with payments. In those cases, understanding your options can help you navigate a tough situation.
So, what happens when you stop paying an SBA loan?
Well, SBA loans are personally guaranteed, which means the lender can come after your personal assets—your home, car, or savings. I’ve seen borrowers think they could just walk away, but the lender will pursue legal action, which could result in wage garnishments or property liens.
Another thing to keep in mind is that every owner who owns 20% or more of the business will need to personally guarantee the loan, and each owner is 100% responsible for the loan. So if you own 50% of the business, that doesn’t mean you are only responsible for paying 50% of the loan back. You are responsible for paying 100% of the loan back.
For example, I had a client whose business failed, and they assumed they could let the loan go. But after the lender took legal action, they ended up filing for personal bankruptcy—a situation that affects your financial future for years.
Bankruptcy is one of the biggest consequences of defaulting. It’s not a quick fix—it stays on your credit report for 7-10 years, impacting your ability to get loans, mortgages, or even jobs. The emotional toll is heavy too, as it often feels like a last resort.
Another hidden consequence is something called CAVRS, a federal database that tracks defaults on government-backed loans. If you’re flagged in CAVRS, it becomes difficult to secure any future federal loans—whether for housing, education, or another business.
Communicate with your SBA Lenders Early and Often
The good news is, there are ways to avoid default before it gets to this point. Lenders often offer solutions like loan restructuring, which can extend the repayment period or lower monthly payments. Some might allow temporary deferments or interest-only payments to help you stay afloat. I had a client who faced a seasonal downturn, making it difficult to make full payments. We worked out a deferment plan, allowing them to pay only the interest for a few months. Once their busy season returned, they caught up on payments without defaulting.
The key here is communication—most lenders are more flexible than you might think, but you need to start the conversation early. If restructuring or deferment isn’t an option, consider other financial tools like a short-term loan to cover the gap. Creating a clear financial roadmap can help. ProjectionHub provides tools to help you build that roadmap and get ahead of potential issues.
At the end of the day, defaulting on an SBA loan is serious. It affects your business, personal finances, and future borrowing ability. But in most cases, you can avoid it by being proactive—talk to your lender, explore restructuring options, or look into other solutions.
So, what can you do today to avoid default? Have you started a conversation with your lender before things spiral out of control? Taking that step now could protect not just your business, but your entire financial future.
