Navigating SBA Loan Troubles

Running a business is not always a smooth ride, and for many entrepreneurs, keeping up with loan payments can become a challenge. Unfortunately, lenders and the SBA are not always willing to rewrite the terms of their loan. However, there may be hope in the form of a loan workout or modification. If approached early enough, a loan modification can be a viable solution for both the borrower and the lender, especially for larger institutions.

The Loan Modification Process

Obtaining a loan modification is not a quick fix, but it can provide a solution for struggling businesses if approached with a strong commitment and viable turnaround plan. The process involves presenting updated business and personal financial information, additional pledged collateral may be requested, and formal appraisals will be conducted. It’s important to note that loan modifications are approved by the lender bank and the SBA on a regular basis, but only if the borrower can show that the business will be able to resume debt service with the modified terms.

Possible Modifications

• Temporary/permanent reduction of interest
• Defer payments and/or principal only
• Extend maturity date to reduce payments
• Temporary reduction of payments
• Re-amortize loan payments

Authorization and guidelines for an SBA loan modification may be found in the Standard Operation Procedure 50-50-4, Chapter 5, paragraphs 8(a), 15(a), 16(a), 17 as well as Chapter 7, Paragraphs 5(b) – 5(h).

SBA Loan Deferment

If your small business is facing short-term financial difficulties due to a seasonal slump, you may consider applying for an SBA loan deferment. If you qualify, the SBA lender or Certified Development Corporation (CDC) can provide a temporary reprieve from paying on the SBA loan, ranging from three to twelve months. During this time, you may be required to make interest-only payments or no payments at all. However, be advised that this option may come with personal guarantees or the need for additional collateral. Before considering a deferment, it’s advisable to seek representation or consultation with a qualified SBA attorney.

SBA Loan Modification

If your small business is still generating revenue but struggling to keep up with the old loan terms, a loan modification may be a viable solution. This option is generally presented when it involves an SBA 504 Loan and the pledged collateral or building’s fair market value has decreased significantly. In this case, a proposal should be made in order to apply for a loan modification that benefits both parties. The borrower will be required to provide updated business and personal financial information, additional pledged collateral may be requested, and formal appraisals will be conducted. Before engaging in the modification process, it’s advisable to seek qualified representation or consultation, or to review applicable SBA SOPs and the Code of Federal Regulations (CFRs).

Step-by-Step Guide to SBA Loan Modification

Navigating the SBA loan modification process can be a challenge, but with the right guidance and tools, it can be a smooth and successful experience. Here’s what you need to know about the SBA’s requirements for obtaining a loan modification.

Key Resources for Loan Modification

To ensure a successful loan modification process, it’s important to familiarize yourself with the following resources:

• The SBA’s Standard Operating Procedures (SOP) Manual: This comprehensive guide details the procedures that SBA participants must follow. Lenders should use the SOP that governed at the time the loan was approved, which may not necessarily be the most current version of the SOP.
• The 7(a) Matrix: A table that outlines the actions and modifications requiring SBA notification and approval and whether they need to be made through E-Tran (the SBA’s electronic transaction and documentation platform).

While the 7(a) matrix is a useful reference tool, lenders should always refer to SOP instructions and the version that governed when the loan closed.

Avoiding Common Loan Modification Errors

Even with the best information and guidance, mistakes can still occur during the loan modification process. Here are some common errors to watch out for:

• SBA approval was required but not obtained
• E-Tran updates were required but not made
• Required documentation was not obtained (for example, a sale agreement and final closing statement must be submitted when property has been sold. Without these documents, the modification is not properly documented, potentially jeopardizing a lender’s guarantee).

While some of these mistakes are correctable, the best course of action is prevention. With proper servicing and guidance, these errors can be avoided.

Expert Help for a Successful Loan Modification

If you’re feeling overwhelmed by the loan modification process, help is available. Our team of over 200 SBA lending experts can offer unparalleled mastery of the demanding SBA requirements. We’ll oversee the modification process so you can enjoy peace of mind knowing that your guarantee remains intact.