So, you got approved for funding from the Small Business Administration (SBA) to help you with your business. However, what happens if you get behind your payments and default on the loan? The SBA loan forgiveness program could be an option.
How SBA Loans Work
The Small Business Administration helps many business owners and their startup companies. It makes it easy for businesses to get financing through partnering with banks. Many of these types of new businesses would not qualify without the guaranty of the SBA loan. If you default on the loan, the SBA pays the lender the guaranteed amount. The maximum SBA guarantee is 85% for loans up to $150,000 and 75% for loans greater than $150,000.
The SBA has their methods of limiting risk of default. Their application criteria are used to help narrow candidates who are a good fit for their programs. Some programs may only allow the loan proceeds to cover specific expenses.
When the loan is approved, your lender is responsible for closing the loan. SBA loans can be used to start your business, manage business expenses, expand your operations, or increase your safety net.
Who Handles Loan Forgiveness?
The SBA decides if loan forgiveness is an option. The bank and the SBA both are involved when someone defaults on the SBA loan. The bank issues funds when the loan is approved so they are the ones who collect on a default loan. After the bank has all their money back, the SBA steps in.
What Is SBA Loan Forgiveness?
The SBA buys back the 50-75 percent of the loan that was guaranteed. They take measures to collect the money back from the borrower. The forgiveness comes in with the settlement agreement. When they pay the bank, you can make arrangements to pay the SBA back as much as you can. Then the administration forgives the balance that is left over.
You have the chance to propose a reasonable amount that you can afford with the payment agreement. The SBA can accept or reject the proposal. To increase your chances of the administration accepting your proposal, the amount you request o pay should be enough to pay back the loan in a timely manner. They want to make sure that you do not default again.
Benefits of SBA Loan Forgiveness
The SBA loan forgiveness program can save your personal assets such as your cars, savings, and homes. It can also help prevent a chapter 7 or chapter 11 bankruptcy, which can take years to recover from. Borrowers will have a better chance of recovering and building credit again.
Disadvantages of SBA Loan Forgiveness
Although the forgiveness program has benefits, there are some consequences as well. It does not leave the company free and clear of debt. There are some challenges borrowers need to be aware of.
To qualify for loan forgiveness, businesses can no longer operate to qualify for loan forgiveness. they need to close their doors and dissolve the business. Also, leaving balances outstanding on the loan will have a negative impact on credit also. It can end up hurting your personal or business credit.
SBA loan forgiveness can affect the chances of getting business loans. Personal lending ability can change too if you have signed as a guarantor on the business loan.