October 22, 2024
Adam Hoeksema
One of the hardest conversations I’ve had as an SBA lender always started with, “What happens to my SBA loan if my business fails?” After spending over 12 years approving more than 1,500 SBA loans as Executive Director of Bankable, this was the question that I hated to hear.
But here’s the truth: businesses fail. It’s part of the risk every entrepreneur takes. And when it comes to SBA loans, the stakes are even higher because it’s not just your business on the hook—you are, too. I’ve seen it happen more times than I’d like, and I’m here to break down exactly what happens when a business tied to an SBA loan doesn’t make it, and how you can handle it from a borrower’s point of view.
Let’s start by understanding how SBA loans work. These aren’t just typical business loans. If you own 20% or more of the business, you will be required to personally guarantee the loan.
What does that mean?
Even if your business closes its doors, the debt doesn’t disappear. The lender can come after your assets—like your home, car, or savings—to cover the balance. It’s a detail that sometimes gets overlooked when people are eager to get funding, but it’s important to understand. “You’re still on the hook personally,” I would remind borrowers, trying to make sure they understood the risks involved. The personal guarantee helps the lender sleep better at night, but it also increases your financial risk.
So, let’s say your business does fail. First, the lender will try to recoup the debt by going after the business’s assets—equipment, inventory, or any remaining value. But if that’s not enough (and it usually isn’t), they’ll turn to you personally. At this point, they might put a lien on your property, garnish your wages, or seize your savings.
And here’s another wrinkle: if you default on your SBA loan, you’ll end up flagged in a federal system called CAIVRS, which tracks defaults on government-backed loans. This can make it way harder for you to qualify for future loans, like an FHA mortgage or even a student loan for your kids. Once you are on that list, it is going to make life more difficult in a number of ways.
It doesn’t end there. Your personal credit score is going to take a hit, too. Defaulting on the loan shows up on your credit report, making it tougher to get approved for future financing. This could impact everything from getting a car loan to leasing an apartment. And believe me, the stress of knowing your personal assets are on the line can weigh heavy, both mentally and emotionally.
But here’s the good news: if you’re struggling with your SBA loan, you still have options—before things hit rock bottom. The first step is to talk to your lender. I know it’s a conversation nobody looks forward to, but lenders are more willing to help when you’re honest about your situation. They might offer to restructure your loan or lower your payments to give you some breathing room. The key is to act early—don’t wait until you’ve missed payments.
Another option is to explore short-term funding to cover immediate needs. A line of credit or a small loan could help keep your business running while you work things out. At the same time, take a close look at your expenses. Are there areas where you can cut back? Sometimes, making a few tough choices on the budget can give your business the time it needs to stabilize.
And don’t forget, you don’t have to figure this out on your own. Get a financial advisor, accountant, or even a trusted mentor to help you come up with a solid plan. Having someone with a fresh perspective can open up options you might not have considered.
In the end, defaulting on an SBA loan is serious, but it’s not the end of the world. If you stay proactive, communicate with your lender, and make smart choices, you can avoid the worst-case scenario.
To build your financial plan, use one of ProjectionHub’s templates to create clear, lender-friendly financial projections. These projections not only improve your chances of getting approved for an SBA loan, but they can also help you avoid surprises down the road by giving you a solid financial roadmap.
