Understanding the Consequences of Not Paying Off an SBA Guaranteed Loan After Closing Your Business

The only reason you have to ask this question is because you didn't read your loan agreement. That was unbelievably stupid.

Even if your business is organized as an LLC or a corporation, the Small Business Administration (SBA) loan agreement will state that you are personally guaranteeing this debt. It is also fairly common for the SBA to require you to put up collateral to secure the loan. Perhaps you agreed to give them a mortgage on your home, a lien on your car, or a lien on your merchant service account. I've heard that the SBA will accept your first-born child as collateral under certain circumstances, so you should have read that contract!

The Importance of Reading Your Loan Agreement

For your business and your home, it is crucial to read the loan agreement thoroughly. If you overlook the personal guarantee clause or the collateral requirement, you could face severe financial consequences. Here’s what to expect if you try to close your business without paying off a guaranteed SBA loan.

Personal Guarantee vs. Collateral

Typically, when an individual or a business seeks an SBA loan, the lender will obtain both a personal guarantee and collateral. A personal guarantee makes you personally responsible for any unpaid loan balance, even if the business is structured as an LLC or a corporation. This means that if you decide to close your business, the lender can come after you personally to recover the debt.

Collateral, on the other hand, is property that the lender can seize and sell to recoup its losses if the loan is not repaid. Common forms of collateral include your home, vehicle, or business-related assets. If the SBA holds a lien on your home or your business assets, a failure to repay the loan could result in the lender foreclosing on these assets.

Debt Recovery by the SBA

If you fail to repay an SBA loan after closing your business, the SBA can take several actions to recover the money:

Suit for Payment: The SBA can sue you in court to recover the unpaid loan balance. Even with a debt discharged in bankruptcy, the SBA can still pursue and enforce the personal guarantee. Foreclosure: If the SBA has a lien on your home or business property, they can foreclose on these assets to recover the loan amount. Repossession: If the SBA holds a lien on your car, they can repossess it and sell it to offset the loan balance. Tax Liens: The SBA can also place a tax lien on your property, which can limit your ability to sell or transfer your assets.

Legal Ramifications and Credit Score Impact

Failing to repay an SBA loan even after closing your business can have serious legal and financial ramifications:

Legal Action: The SBA can take legal action against you, which can result in a judgment against you. This judgment can be used to garnish your wages or seize other personal assets. Credit Score: Non-payment of a SBA loan can severely impact your credit score. This can make it difficult to obtain future financing or credit for years. Bankruptcy: You may consider filing for bankruptcy to discharge the debt, but the SBA has strong grounds to contest discharge and may pursue you after bankruptcy.

Preventing These Consequences

To avoid these dire consequences, ensure that you:

Read and Understand Your Loan Agreement: A thorough reading of the loan agreement and seeking legal advice can help you understand the terms and conditions. Stay Compliant: Make sure the business complies with all SBA requirements, such as maintaining accurate financial records and making timely payments. Evaluate Repayment Options: If financial distress is looming, explore options to refinance or restructure the loan before closing the business.

Remember, the SBA loan agreement is a legal document with significant consequences. Ignoring it can lead to financial ruin. By understanding the personal guarantee and recognizing the importance of collateral, you can avoid potential hardships when facing difficult business decisions.