The Hidden Risk of SBA Loans If Your Business Closes


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The two most popular programs from the CoronaTax for small business were two loans: Paycheck Protection Plan (PPP) and Economic Injury Disaster Loan (EIDL).  

The PPP loan can actually become a forgivable grant if you spend the money in accordance with the loan requirements within a certain period of time. The EIDL may have a forgivable grant included (not always), but the bulk of the program is a 30 year loan with interest fixed at 3.75%. 
Despite that help, some businesses won’t survive the recession (or depression). In fact, it’s estimated that 25% – 30% of small businesses won’t.
Now what?
What happens to the SBA loans if your business shuts down?  

In the case of the PPP, you have a relatively short period after which you receive the money in which to spend it. That was originally 8 weeks, but it has been recently extended to 24 weeks.  

It’s likely that most of the PPP loan will be forgiven since the time frame is shorter and it’s easier to do. However, if the time frame has passed and the money hasn’t been spent, there could be a loan left at 1% interest per annum, all due and payable over 5 years.  

 If the amount due is under $25,000, there would be no collateralization of assets. That means if the company shuts down, the SBA would have no claim on any of the assets. It’s a pretty easy step to merely shut down the business 
The EIDL has a much smaller forgiveness portion, limited just to the advance. The loan itself is going to be around a lot longer because there is a longer term, 30 years. Like the PPP, if the original loan amount is under $25,000 there would be no collateralization of assets. And, just like with the PPP, the SBA would not have any claim on the small business assets.  

Let’s look at the other end of the scale. If your SBA loan is over $200,000 initially, then the owner(s) will have had to personally guarantee the loan. If that’s the case, if you shut down the business, you will have to step up and guarantee the loan. That means you’re personally on the hook for the SBA loan.  

If the loan is over $25,000 but under $200,000, then there will be collateral that the government has a lien on. In most cases, the SBA would have made an UCC-1 filing on the personal property assets. That’s just like the bank putting a mortgage on your home if you have a home loan.  

The UCC-1 filing means that any assets in the business such as inventory, furniture, fixtures, computers and receivables can, and probably will, seize the assets to over the business’s outstanding debt.  

Although the SBA hasn’t stated definitively that they will report your activity on your credit report, it’s likely that they would report a loan default. That means your credit score would drop as well.  

These loans were rushed quickly and there is a concern by some experts that some applications were approved too quickly. It’s very possible that there are errors or omissions on the application. And when it comes down to it, it won’t be the lender or bank that’s in trouble. It’ll be the applicant.  

As long as the loan is paid, it’s unlikely that there is a problem. But if there is a default, the SBA could look for borrower errors. 

Don’t have your EIDL money yet? The EIDL program is funded again. Get your money while you can. 

How do the PPP and EIDL work together? There are things you must know if you have both loans. Get up to speed fast on PPP & EIDL together 

 

 

 



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