The tragic flaw of an SBA guaranteed loan.
Every bargain has its benefits for each party, most often there is an inherent risk as well. There are frequently side detriments, or embedded risks which if known are evaluated as worth the ‘investment’ as the upside is valuable enough to accept the downside potential problems. Frequently however, if the embedded risks are not known and therefore cannot be evaluated, the borrower is setting himself up for painful failure without knowing it.
Regarding an SBA loan, the promise to provide crucial financing for unbankable applicants, presents a very compelling and attractive proposition. Just as clear the SBA guaranteed loan borrower is frequently not aware of the built in possibilities for disaster at the hands of the very agency that is providing you with this huge benefit…a loan you could not otherwise get.
So here is the proposition few really understand about an SBA guaranteed loan.
You had best succeed, because if you default on your loan, there are few back door options, no clear workout alternatives other then the promise of liquidation of all the assets including those owned personally to support the personal guaranties provided. Recall, that the loan required spousal signing for the sole purpose of providing the bank an opportunity to reach and liquidate your home, even if the spouse is not involved in the business the loan is supporting.
Frequently the loan starts out with a subordinate attachment to the home of the loan, making bankruptcy relief difficult if not impossible also. It is a second or third mortgage, just for the purpose of being in line to liquidate it.
The basic premise is, if the SBA gives you this guaranty, so the bank will lend you, you had better succeed because of you do not they will liquidate everything the business and you own including your personal assets, your home.
In fact even if the bank you are borrowing from would under normal circumstances provide various additional avenues for workout relief, they cannot do it wtith an SBA guaranteed loan. There is only one available relief plan for an SBA loan…3-6 months of interest only payments…that’s it, and it’s hardly very helpful in the long run.
There is an offer in compromise process which still leaves your personal assets at risk but does have the potential for reduction of principle, however in the exuberance of the banks fulfilling their requirement to the SBA to ‘exhaust their legal remedies to liquidate the collateral’ they frequently do not tell the borrower about this possibility, and if asked they frequently misguide borrowers and outright lie to them about the possibilities of relief along this line.
Bankers and their lawyers frequently misrepresent the program and the information, leaving the borrower high and dry primed for liquidation so the bank can fulfill its commitment to exhaust its legal remedies so it can collect the guaranty, and this is the reason for such aggressive reactions to default, the bank has committed to exhaust its legal remedies in liquidating the collateral in order to receive its guaranty payoff from the SBA !
I receive many many calls each week from borrowers facing foreclosure and total liquidation without a word from the bank about the possibility of relief from an offer in compromise program. Worse yet I receive just as many calls from borrowers facing liquidation that have received absolutely wrong information, completely misleading the borrower and usually preventing the borrower from such relief.
The SBA Offer in Compromise program is apparently simple -but clearly in practise is very difficult- filled with traps and barriers and in the end it is very difficult to facilitate effectively .
Thus its is like a deal with the devil. You may get a benefit but the cost of failure can be greater then you anticipate.
Unfortunately many small businesses fail thus this is a very real issue confronted by many many borrowers.
Be aware of the true nature of this bargain and be prepared to handle he downside should that day occur.
If you get in trouble call me, we can help. Call Norm @ 413-584-2581 he will arrange a tele-conference for us to discuss your situation.
Don,
Just read your blog on SBA loans. Question, with the risk that you outlined, why are you suggesting that I try and get an SBA loan? You say that it requires spousal signing for the purpose of providing the bank an sppoortunity to reach & liquidate the home, even if the spouse is not involved in the business. I don’t want Linda to have to sign for a loan, it’s her house, she bought it and has been paying on it for over 15 years. Is there an upside to an SBA loan?
Serges
Can you please explain the steps to me in the event of a default of a SBA loan? Does the bank attempt to collect 100% or only the 25-10% they are responsibile for? Then does SBA come after the personal guarantors for the remainder?
Don:
Like so many others, we personally backed an SBA loan with lots of collateral (all my husband’s construction equipment). My bank told me that if the loan is called then they can not take our house (because of the homestead exemption), or our IRA’s? Is this true? And can I take a large sum of money out of my savings to put in a safe somewhere so that we have something to fall back on in this scary economy?
I would appreciate any advice.
Don,
We are in this exact predicament and don’t really know what to do at this point. Is the offer in compromise program something that gets initiated through the SBA or the bank? Do you know if the TARP program has any impact on whether the banks have to work with borrowers? What about the Economic Stimulus Package – is there anything in there to help small business owners who are struggling (why don’t we deserve a bailout?)? Finally, have you ever heard of any success with bringing an action against the bank using the Truth in Lending Act? We were mislead all throughout this process.
Cheryl
connie asked…. can they take your personal home if it is homesteaded?
you never answered
Hi,
You mentioned on your blog that debts prior to homestead Will not qualify for the exemption.when does a personal guarantee become a debt.upon signing or upon default.
I received a sba express loan from my local bank almost 2 years ago. I have never been late on a payment yet my bank is pressuring me with threats of default because I have an adiitional business bank account at another bank. Am I required to only have one business account at 1 bank or to carry a minimum balance? Can my bank default me even though I have paid all payments early? It feels like they are trying to controll me, I feel that as long as I pay my bills I should not be receiving this grief. This may not be aplicable here but I dont know who else to ask.
Thanks
Thank you for your question and allow me to qualify my answer as stated in the Blog entry as it applies to you and your case.:
In your case I believe the house is just in your wife’s name and thus you are not an owner. Since you are the one applying for the loan the only assets they could reach and legitimately ask for security from would be assets you have an ownership in, thus they cannot pressure you into getting your wife’s signature or personal guaranty. With those husbands who have a property interest in the marital home, which is most, they are pressed to the wall by the banks to get the wife’s signature even if it’s a limited guaranty just to give them clear access to your home.You will not have to do this as you are not an owner in the first place.
My second reason is ‘knowledge is worth a kings ransom’…People have been known to resist demands for spousal guarantees and with he knowledge I give out here succeed in resisting. You will of course not fall into this trap for all the reaons discussed.
Finally, I also believe your business has proven to be a winner and continues to grow during this recession as it is very carefully managed so it will continue to succeed, thus the risk is very very low for you. However be certain that as I have stated to date there will be no need nor would I allow your wife to sign anything…
Thanks for the question.
Don
You have most of it correct. The banks job is to collect as much as they can however their primary focus is on liquidating the colateral and then we file the offer in compromise with the SBA regarding the personal guaranty. The banks goal and objective is to collect 100% of what is owed not just the part not guaranteed.
I understand your concern, it is quite natural, but there are better ways to protect yourself then hiding cash…call we can discuss some options, 413-584-2581 Norm will arrange a no obligation tele-conference.
Yes Cheryl there is much that can be done, but not the direction you are taking, please call me and arrange a no obligation teleconference and we can discus your alternatives…413-584-2581
it depends when the homestead was filed. If the debt being foreclosed upon occurred prior to the filing of the homestead then you have a problem, as the homestead only protects from after acquired debt not prior debt…in other words if the horse is out of the barn its to late to shut the door. Also depends upon specific state law…each state is different.
upon default.