Expert: Christine Janklow - 6/4/2010

Question
Hi there...i am wondering if the typical SBA loan that was used to purchase a building and begin a business follows the same foreclosure rules as household, meaning do you need to be 90 days late on a payment before the bank can begin foreclosure proceedings or can they begin it for any reason such as not submitting year-end paperwork?  Are there general guidelines that consumers can look up on the SBA site somewhere?  I have not been able to get my local SBA office to return a call in two weeks, so i am looking for an advocate to mediate between the bank and myself.  While payments have been late due to extenuating circumstances, they have not been more than 60 days late, I have asked the bank to extend the term thereby lowering my monthly payment to a reasonable amount that i could make comfortably on time but they say the SBA does not allow such things.  Meanwhile I have talked with several other consumer groups that tell me the SBA does have mediators and YES they do provide for longer terms in order to lower payments etc. Please help, I need some straight answers.

Answer
Dear Madame: Thank you for the question. Unfortunately your situation is not so simple. You probably have placed a personal guarantee on the loan.  This meant that you, the small business owner, had to put up your house, retirement fund or other personal asset to secure the SBA financing. When facing SBA loan default, the bank has every right to, and will, call in your personal guarantee. You will lose your house and your personal assets to pay back the bank. Once the personal guarantee is paid, and if you still owe money, only then does the SBA backing kick in. That's it. End of story. The bank still gets all its money and you lose if you default on the loan.

So what do you do when your business is financially strapped? The SBA will bend either through offers in compromise, or settlements or put you in a hardship program. They usually don't do this until the loan is late. You need to consider if perhaps settlement or reduction of your other business debts will help you reduce debt servicing costs so you can afford to pay the SBA off. I know a lot of business owners that will rather pay a 30% interest rate on a credit card to "preserve" their credit score, than pay a secured SBA loan. Not a good idea as indicated above. Often debt reductions with other creditors is what is needed to enable your business recovery. If the SBA offices are being unresponsive, get in your car and drive down there until you get the answers you seek.  My advice is to be proactive and do all you can to get everything in a payment plan you can live with. I hope you found this answer helpful, if so please provide a positive rating.

Respectfully,
Christine Janklow