Surprise! No negative credit issues from defaulted SBA guaranteed loans!

Every small business owner I speak with who has a defaulted SBA loan, and wants to discuss workout possibilities, worries about the negative impact such default and workout strategies will have on their credit score.

To which I reply:

1. Really, so what?  What choices do you have?  While negative impact on credit score may be a problem, compared to the real issues of defaulted debt, debt workouts are the only way to safely resolve the issues even if the net result is a  more reduced credit score.  Which would you prefer? $500,000 of debt forgiveness and a reduced credit score, or $500,000 of defaulted debt and a reduced credit score anyway.

2. At the end of my workout, we take our clients through a credit rehabilitation program which returns your credit score to its previous position -or better- so there are no long term credit dings to be concerned about.  My pre-emptive workout program takes about four months and works very well.

The real answer lies however in the way that SBA loans are typically structured.  It is the business entity that is the primary borrower.  You, the business owner, are the guarantor.

If a default occurs, the business gets the credit blemish -not the guarantor.  Thus in the end there are no credit consequences for the owner from the default or the subsequent workout.

Frequently there are many aspects to a workout including credit cards and subsequent workouts with secondary lines if credit, home equity  loans, and other indebtedness such as leases, etc, which may name the business owner as the primary borrower and thus a credit issue may result out of default or the workouts.

Worse, in some instances, credit defaults are improperly reported resulting in an inappropriate but real credit blemish.

I revert back to the above resolution, credit rehabilitation…to clean up and restore a client’s credit score once the workouts are complete, and any damage that was done is reported which then can be repaired.

The real issue and answer is however, you really have no choice.

With bone crushing debt threatening to destroy your business and personal financial condition, you must fight the fire with a proactive defense and a positive offense.  You must first workout the debt, and then if necessary repair any damaged credit.

More often then not, the business owner’s credit score has been decimated already by the trials and tribulations of small business cash flow issues, with the many peaks and valleys of growth and development.   Typically, well before the eventual default occurs, the business owners credit is already severely beaten up.

One surprise advantage of a debt workout for most business owners is an actually improved credit score -after the workout is concluded and the rehab process also finished.

So in reality credit scores are not the primary issue  -and frankly? in my opinion not an issue at all.

The real issue is the overbearing debt load that is the killer of small businesses -especially in the declining revenue situation which many small businesses are experiencing in this meltdown economy-  this business killer must be tackled and reduced, and the effect that such procedures may have on the credit score is irrelevant to business survival, and survival is far more important.

If a negative impact occurs, reducing your score, it’s a small price to pay for resolving an overbearing debt load -and the score can be repaired safely anyway.  So let it go and do your workout, as soon as possible.

Call me if you need help or more information on this important subject, as it bothers everyone I speak with.  call my office at  413-584-2581, Norm will arrange a no obligation tele-conference

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