Introduction
When a business that has received a Small Business Administration (SBA) loan closes down, it raises questions about the fate of the loan. Small businesses often rely on SBA loans to start or expand their operations, but what happens to the loan if the business is no longer able to continue? In this article, we will explore the various scenarios and outcomes that can occur when a business closes down with an outstanding SBA loan.
Loan Repayment
Responsibility for repayment: The first thing to understand is that the business owner is typically responsible for repaying the SBA loan, regardless of whether the business is still operating or not. Closing down the business does not absolve the owner of their obligation to repay the loan.
Personal liability: In many cases, SBA loans require a personal guarantee from the business owner. This means that even if the business fails, the owner is still personally liable for the loan. The SBA can pursue the owner’s personal assets to recover the outstanding loan balance.
Loan Default
Defaulting on the loan: If a business is unable to make loan payments and falls into default, the SBA has the right to take action to recover the outstanding balance. This can include seizing collateral that was used to secure the loan, such as property or equipment.
Collection efforts: The SBA may also employ collection efforts to recover the loan, such as contacting the borrower and attempting to negotiate a repayment plan. They may also hire a collection agency or take legal action to recover the funds.
Loan Forgiveness
Bankruptcy: In some cases, if the business owner files for bankruptcy, the SBA loan may be discharged as part of the bankruptcy proceedings. However, this is not always the case, and it depends on the specific circumstances and type of bankruptcy filed.
Offer in Compromise: Another possibility is that the business owner may be able to negotiate an Offer in Compromise with the SBA. This is a settlement agreement where the borrower agrees to pay a reduced amount to satisfy the loan. However, the SBA is not obligated to accept an Offer in Compromise and will consider factors such as the borrower’s ability to pay and the likelihood of recovering the full amount through other means.
Impact on Credit
Credit score: Closing down a business with an outstanding SBA loan can have a negative impact on the business owner’s credit score. Late payments, defaults, or bankruptcy filings can all significantly lower credit scores, making it more difficult to secure future loans or credit.
Credit reporting: The SBA loan and any associated defaults or late payments will be reported to credit bureaus, which can stay on the borrower’s credit report for several years. This negative information can make it challenging to obtain credit in the future.
Conclusion
In conclusion, when a business closes down with an outstanding SBA loan, the responsibility for repayment typically falls on the business owner. They may be personally liable for the loan and may face collection efforts or legal action if they default. While there are options such as bankruptcy or negotiating an Offer in Compromise, these are not guaranteed solutions and depend on the specific circumstances. It is important for business owners to be aware of the potential consequences of closing down a business with an SBA loan and to explore all available options.
References
– sba.gov
– bankrate.com
– entrepreneur.com
