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What to Include in a Hardship Letter for a SBA-Backed Bank Loan

Article | April 14, 2019

Here’s what you need to know to write a hardship letter that will get accepted.

A person writing a letter

The debt settlement process for an SBA-backed bank loan is seldom easy or straightforward. We guide clients through this maze all the time, but many borrowers in default try and settle their debt on their own when it is relatively straightforward. The required documentation for submitting an SBA Offer in Compromise is quite simple. An SBA 770 form (the personal financial statement and monthly cash-flow statement), an SBA 1150 form (the document used to put forth the settlement offer and justification for that offer amount), and supporting documentation – 2 years tax returns, bank account statements, home valuations, etc. One thing that is not required as part of an Offer in Compromise package but, in fact, may be one of the most important documents to submit is an SBA hardship letter or narrative.

By the time a guarantor is submitting an Offer in Compromise, the loan has most likely transferred from the loan-servicing department of the bank to the workout or special assets department. The workout officer who is handling the liquidation of the loan’s collateral and the Offer in Compromise settlement may not know very much about the front end of the loan. They have some notes in their file and have most likely reviewed that information, but it is key to point out that these workout officers often have hundreds of files that they are handling at once. Therefore it is imperative that you point out as much pertinent information in an accompanying hardship letter as possible so that your story can be heard loud and clear.

An SBA hardship letter should always start out with some background on the loan – the steps that were taken during the due diligence phase of the business acquisition to ensure that you weren’t borrowing too little or too much, who the business was purchased from, non-competes that were put in place, etc. The SBA needs to know how much work you put in before acquiring the loan and purchasing or starting the business to ensure that you would be able to make payments on the debt service of the loan.

Every guarantor submitting an Offer in Compromise settlement package has a unique set of circumstances. Yet there are some common issues that many of our clients share and should be addressed in the SBA hardship letter. Those issues are as follows:

  • Problems When the Loan Was Issued – Were you able to acquire the amount of capital that you needed to successfully launch your business? Did the SBA lender limit the amount borrowed leading to the business being underfunded from day one? Did it take longer to get the business up and running, and therefore, working capital that was earmarked for other purposes had to be used to pay debt service initially?
  • Seller Fraud and Misrepresentation – This is a ubiquitous story that we hear all too often from our clients. The financial information that was provided by the former owner of the business during the due diligence phase was later found to be inaccurate, with sales and revenue figures inflated. Did the previous owner represent that they would not open another competing business and even sign a non-compete, but then open a competing practice within the range of the non-compete clause? The responsibility is yours when borrowing money that you complete thorough due diligence before buying a business and borrowing money, however, we have seen some extreme situations where the borrower was taken advantage of. This is relevant information in your letter.
  • What Have You Done to Alleviate the Problems – When revenue numbers declined or never hit expectations, what actions were taken to mitigate this? Did you discuss your problems with the lender? Did you request an interest only forbearance period or a modification of the loan and was it granted or denied? Did you cut payroll, work with your landlord to reduce rent, explore sales and marketing strategies? Any and all of these measures should be noted in the hardship letter. If you went through a debt workout, your efforts to get the best recovery value possible for the secured creditors should be noted.
  • Current Financial Situation – What does your personal balance sheet look like? Is your home underwater on it’s mortgage or is there any equity? Have you considered the option or refinancing the property to pull out equity to settle with the SBA? Perhaps the most important aspect of your personal financial situation to point out is a number of personal assets that were liquidated to prop up the business and subsidizing the losses. Detail is critical and it should be noted which assets were liquidated when and exactly how much was put into the business. You should explain your current sources of income and if you expect the amount to change soon. Some assets and liabilities are self-explanatory such as credit cards and auto loans. For others, such as annuities or repayments on notes held, you should provide detailed information. For instance, you may be receiving annuity payments on a monthly basis, but those payments could be ending in the coming months or years. That needs to be pointed out.

Once you have fleshed out all of the facts surrounding your hardships, it is time to put forth the settlement offer, and explain why it is in the creditors best interest to accept that offer. It should be explained that you have put forth your best effort to gather as much money as possible to contribute towards the settlement. Any sources of funds whether it be friends, family, personal loans, etc. should be noted. Also, it should be pointed out that you understand that any exposed assets such as equity in a property, securities, notes receivable, etc. have been taken into consideration when determining the offer amount to put forth.

When in question about what information to include in an SBA hardship letter, it is always advisable to consult an expert. Second Wind Consultants has taken clients through the Offer in Compromise settlement process hundreds of times and can provide expert guidance and advice throughout the process. If you are struggling to settle a debt or you have no idea how to begin, please give us a call and set up a free no-obligation consultation.

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