The Bank Is The Problem When Working Out A Defaulted SBA Guaranteed Loan, Not The SBA.

We hear about it all the time. The banks are unwilling to cooperate with any number of potential workouts that would allow a business to stay alive, keep some debt service flowing and save jobs. With a most unreasonable and recalcitrant attitude, the banks move to foreclose and liquidate the collateral seemingly faster and faster, and ultimately, as quickly as they can implement the process.

Why won’t they work with the borrower? We used to say it was because the SBA requires liquidation of the collateral and cessation of the business. However, that’s not necessarily so. Now they are encouraging the lenders to make any sort of modification that makes sense to keep the loan and the business active, viable and performing.

The problem is, the lenders would much prefer to get the 80% guaranty from the SBA, which will probably put them into the black (or at worst, demonstrate a minor loss) and this is preferable to partial payments on a restructured payment schedule. Unfortunately, the SBA relies heavily on the bank’s decision and while encouraging them to make adjustments, they cannot enforce this policy and the banks are committed to eliminating these so-called bad loans. In this instance, the SBA guaranty is working against the defaulted borrower as there is no incentive for the bank to work with the borrower and there is a significant incentive to foreclose and liquidate and get paid by the SBA guaranty.

We monitor this carefully and when necessary, we go right to the SBA and get help to influence the behavior of the banks. This frequently works for us but it is a challenge. Most often, we apply our proven strategies that support the bank’s goals and objectives, as well as ours on behalf of our defaulting borrower.

It is really a matter of knowing what is permissible and then getting the banks to support it. It is a challenge but we get it done.