SBA Says My Business Wasn’t Operating: How to Prove Otherwise

SBA Says My Business Wasn’t Operating: How to Prove Otherwise

You opened the letter from the SBA, and you’re heart sank. They’re claiming you’re business “wasn’t in operation” during the eligibility period. Your stomach drops. You were operating—you had customers, you payed bills, you filed taxes. How can they say this? And now their threatening to demand repayment of the entire loan, plus your on the hook personnally because of that personal guarantee you signed.

What do you do in the next hour, the next day, the next week?

Look, your not alone in this. Thousands of business owners are getting these letters in 2025 as the SBA ramps up it’s post-COVID audit efforts. And here’s the thing—most of these denials aren’t about actual fraud. Their about paperwork mismatches, especially problems with IRS transcripts that the SBA pulls automaticaly. This is fixable, but you need to act fast and smart.

Why SBA Claims You Wasn’t Operating: The Real Reasons

The SBA doesn’t just wake up one day and decide to challenge you’re operational status for no reason. There’s usually a specific trigger, and understanding what it is will determin your entire strategy for fighting back.

In my experiance handling these cases, about 80% of “business wasn’t operating” determinations trace back to one thing: problems with your IRS tax transcript. The SBA uses automated systems to pull what’s called a “Record of Account” transcript from the IRS. If that transcript shows $0 gross reciepts, or if no return was filed for the eligibility year (February 15, 2019 through February 15, 2020 for most PPP loans), the SBA’s computer flags your file before any human even looks at it.

And here’s were it gets frustrating—sometimes the IRS transcript is wrong, delayed, or incomplete.

Alot of business owners don’t realize they can pull their own IRS transcript before the SBA does. You should do this immediantly. Go to IRS.gov and request you’re “Record of Account” transcript for the tax year that corresponds with your loan eligibility period. When you get it, look at line 33 on the transcript—that’s were gross receipts show up for a Schedule C filer. If its blank or shows $0, that’s likely why SBA is saying you wasn’t operating, irregardless of weather you actually had business activity or not.

But it ain’t always about the IRS. Sometimes the SBA is looking at your documentation and they don’t think it proves continous operation. Here’s something critical that trips people up: the SBA doesn’t require year-round operations. There regulation says you need to be “in operation” for ANY 12-week period during the eligibility window. Most business owners try to prove they was operating for the entire year of 2019, when really they should be focusing on there strongest 12 consecutive weeks.

If you run a seasonal business—landscaping, tax preparation, tourism—your going to want to concentrate you’re proof on your peak season, not scatter it across months when you had minimal activity. Think about it this way: if you’re a tax preparer who does 80% of your buisness between January and April, don’t send the SBA bank statements from July showing two transactions. Send them February and March statements showing 50 transactions, along with your 941 payroll filings from that same quarter. Stack your evidence in the period that makes you look most operational. The 12-week window is your friend if you use it strategicly.

And then their’s the documentation quality issue. You might of operated, but you can’t prove it to the SBA’s standards. Not all evidence is created equal in there eyes. A stack of credit card reciepts doesn’t carry the same wait as an IRS tax transcript showing gross receipts. A customer testimonial doesn’t mean much compared to a Form 941 quarterly payroll tax filing. The SBA has a evidence hierarchy (which we’ll get into later), and if your submitting low-tier proof, your gonna keep getting denied even if you genuinely was operating.

One more thing people don’t realize: the burden of proof is on you, not the SBA. They don’t have to prove you wasn’t operating—you have to prove you was. And that means documentation, not just your word. I’ve seen cases where business owners insist “I had customers, I did work,” but they can’t produce invoices, they didn’t file tax returns, and there bank account shows mostly personal transactions. From the SBA’s perspective, that looks like a business that wasn’t really operating, or at least not in a way that qualifies for federal loan programs.

So to sum it up: the SBA is claiming you wasn’t operating because (1) their automated system flagged a IRS transcript issue, (2) you proved the wrong time period or didn’t focus on your strongest 12 weeks, or (3) the documentation you provided doesn’t meet there evidentiary standards. The good news? All three of these are fixable problems if you know what your doing.

Your First 72 Hours: The Critical Action Window

Alright, so you got the denial letter. Your probably panicking, maybe calling everyone you know, thinking about how to argue with the SBA.

Here’s what you need to do in the first hour: don’t call the SBA yet.

I know that sounds counterintuitive, but hear me out. When you call and start arguing before you’ve gathered you’re facts, you create a hostile record. The loan officer takes notes. If you say something incorrect, or if you get emotional (and who wouldn’t?), that goes in your file and it can hurt you later.

Instead, your first move should be to request the specific documents the SBA reviewed that led to this determination. You can do this in writing—send a email or letter to the loan officer or the SBA district office that sent the denial. Ask for: (1) the IRS transcript they pulled, (2) any other financial documents they reviewed, and (3) the specific regulation or policy they based the “wasn’t operating” finding on. This gives you the roadmap. You can’t fix a problem untill you know exactly what triggered it.

While your waiting for that response (which might take a few days), start gathering you’re own evidence immediantly. And I mean right now—like, stop reading this and go do it after you finish this section. Here’s your checklist for the first 24 hours:

• Pull your IRS “Record of Account” transcript for the eligibility tax year (2019 for most PPP loans)
• Locate your original tax return—the actual return you filed, not just the transcript
• Get bank statements for your business account covering the eligibility period
• Find any invoices, reciepts, or payment records from that timeframe
• Dig up payroll records if you had employees (or paid yourself through payroll)
• Look for business license renewals, lease payments, insurance payments—anything with a date stamp

Make a folder, put everything in it. Your going to need this weather you do a DIY reconsideration or hire someone to help you.

Now, here’s were strategy comes in. Between day 1 and day 3, you need to make a critical decision based on your loan amount, because not all “business wasn’t operating” cases are created equal in terms of enforcement risk. The SBA Office of Inspector General (OIG) doesn’t investigate every case—they triage based on dollar thresholds and fraud indicators. Heres the breakdown:

Loans under $25,000: These typically go through administrative review, not criminal investigation. The stakes are lower. If you have decent documentation (bank statements showing transactions, a tax return that shows some gross receipts even if not alot), you can probly handle the reconsideration yourself. The SBA isn’t gonna refer a $15,000 loan to the DOJ unless there’s blatent fraud indicators.

Loans between $25,000 and $150,000: You’re in the middle zone. The SBA might pursue civil remedies under the False Claims Act if they think you misrepresented operational status. You could face a repayment demand plus penaltys. This is where you need to seriously consider hiring a SBA attorney or a CPA with SBA experiance. It’s not automatically criminal, but the consequences are serious enough that professional help is worth the cost.

Loans over $150,000: This is were things get real. The OIG has the resources and motivation to investigate larger loans. If the SBA is claiming you wasn’t operating and your loan was in the six figures, your at risk of criminal referral. I’m not trying to scare you, but—actually, no, I am trying to scare you a little bit, because you need to take this seriously. Hire a attorney who handles federal criminal defense or white collar cases. Don’t mess around with this tier.

So based on were you fall in that range, your day 1-3 decision is: DIY reconsideration (under $25K, good docs), hire a professional (middle zone), or lawyer up immediately (high dollar amount or any hint of fraud allegations).

One more thing for this critical 72-hour window: do the evidence audit. Sit down with everything you gathered and make two lists. List 1: “What I Have.” List 2: “What I Need.” Be brutally honest with yourself. Do you have a IRS tax transcript showing gross receipts? That’s gold. Do you have Form 941 payroll filings? Also gold. Do you have…a bunch of credit card statements and some unsigned invoices? That’s not as good. We’ll talk about the evidence hierarchy in the next section, but for now, just know were you stand. If your evidence is strong, you can be aggressive in your reconsideration. If its weak, you might need to fix the underlying problem (like filing a amended tax return) before you even respond to the SBA.

And here’s the kicker—don’t wait the full 30 days to respond. The reconsideration deadline is usually 30 days from the denial letter, but the sooner you respond with quality documentation, the better. It shows your taking this serious and your not scrambling at the last minute.

The Documentation Strategy: What Actually Proves Operations

Alright, lets talk about what the SBA actually values when your trying to prove you was operating.

Not all documents are created equal, and this is were most people screw up. They send the SBA a 50-page PDF of every scrap of paper they can find, thinking more is better. But the loan officer reviewing your file doesn’t have time to sift through that mess. What they want is high-quality, relevant evidence that directly proves business operations during the eligibility period. And the SBA has a internal hierarchy of what they consider strong versus weak proof.

Here’s the hierarchy, from strongest to weakest:

Tier 1 Evidence (The Strongest Stuff)

This is the gold standard. If you have even one Tier 1 document, your chances of success go way up. Tier 1 includes:

• IRS tax transcript showing gross receipts—This is the big one. If line 33 of your Record of Account transcript shows gross receipts for the eligibility year, that’s basically case closed in your favor. The SBA’s automated system is looking for this, so if you’ve got it, lead with it.
• Form 941 quarterly payroll tax filings—If you had employees (or paid yourself through a W-2 as a S-corp owner), your 941 filings prove you had payroll activity. The SBA loves these because their filed with the IRS and hard to fake.
• State sales tax remittances—If your business collected and remitted sales tax, those records are strong proof. They show commercial transactions and regulatory compliance.
• Audited financial statements—If you had a CPA audit your financials (rare for small businesses, but some do), that’s top-tier evidence.

Strategy for Tier 1: You need at least one Tier 1 document in your reconsideration package. If you don’t have one, your fighting uphill. If your IRS transcript is blank or shows $0, that’s were the amended return strategy comes in (we’ll cover that in the next section). But basically, don’t submit a reconsideration without Tier 1 evidence if you can possibley avoid it.

Tier 2 Evidence (Moderate Strength)

Tier 2 is solid, but it won’t carry the day by itself. You’ll need multiple Tier 2 documents from different categories if you don’t have Tier 1. Tier 2 includes:

• Business bank statements showing transactions—These are good, especially if they show regular deposits from customers and withdrawals for business expenses. But they need to be cleary business accounts, not personal accounts with occasional business activity mixed in.
• Invoices to customers with proof of payment—Invoices are great if you can match them to bank deposits or recieved payments. An invoice by itself doesn’t prove the customer paid, so pair it with evidence of payment.
• Business license renewals—If you renewed your business license during the eligibility period, that’s proof you intended to operate. It’s not proof of actual operations, but it supports your case.
• Commercial lease or rent payments—If you rented office space, a storefront, or a warehouse, those lease payments show ongoing business expenses. Include the lease agreement plus proof you actually made the payments (canceled checks, bank statements).

Strategy for Tier 2: If you lack Tier 1 evidence, you need at least 3-4 Tier 2 documents from different categories. Don’t just send bank statements—send bank statements + invoices + lease payments + business license. The variety matters because it paints a fuller picture of operational activity.

Tier 3 Evidence (Weakest—Use Only as Supplement)

Tier 3 is were people get in trouble. They think this stuff proves operations, but the SBA views it as weak or irrelevant. Tier 3 includes:

• Credit card statements (could be personal expenses)
• Utility bills (doesn’t prove business activity, just that you paid electric)
• Unsigned or unpaid invoices (no proof the transaction happened)
• Customer testimonials or affidavits (anyone can write these)
• Social media posts or website screenshots (easy to fabricate or backdate)

Strategy for Tier 3: Never submit Tier 3 evidence alone. It makes you look desperate and undermines your credibility. Use Tier 3 only as supplemental support to Tier 1 or Tier 2 evidence. For example, if you have Tier 1 (tax transcript) and Tier 2 (bank statements + invoices), you could add Tier 3 (utility bills showing business address) to round out the picture. But Tier 3 by itself? Forget it.

Special Strategies for Seasonal and Sparse Operation Businesses

If you’re business is seasonal, you need to be smart about were you concentrate your proof. A landscaping business that does 90% of its revenue between April and October shouldn’t send the SBA documentation from December. Focus on your peak months. Same with tax preparation businesses—show the SBA your January through April activity, not your July lull.

For sparse operation businesses (freelance consultants, side gigs, part-time ventures), the trick is to emphasize consistancy of expenses even if revenue was low. If you paid yourself a monthly draw, if you maintained a business bank account, if you renewed your LLC registration—these are proof of ongoing operational intent. And remember, the regulation says “in operation,” not “highly profitable.” You don’t have to show that you made alot of money, just that the business was functioning.

The “Payroll Without Receipts” Loophole

Here’s something most people don’t know: you can prove operations through payroll activity alone, even if you had zero customer revenue. The SBA’s definition of “in operation” includes “paying employees.” And guess what? If your a sole proprietor who paid yourself, or a S-corp owner who ran W-2 payroll to yourself, that counts.

So if your in a situation were you didn’t have alot of customer transactions during the eligibility period, but you did pay yourself (or family members) for business work, emphasize that. For sole proprietors, you can file a Form 1099-NEC to yourself retroactively to document the payment. For S-corps, your Form 941 payroll filings are proof. For partnerships, show the K-1 distributions. The point is, “operations” doesn’t just mean sales to customers—it means business activity, and paying yourself for work is business activity.

One last tip on documentation: organize it cleanly. Don’t just dump a pile of papers on the SBA. Create a cover letter that says, “Attached is evidence of operations during [specific 12-week period]. This package includes: (1) IRS tax transcript showing $X gross receipts, (2) Form 941 for Q1 2019, (3) bank statements for Jan-March 2019, (4) five customer invoices with payment proof.” Number the exhibits. Make it easy for the loan officer to see that you’ve met the burden of proof. Presentation matters more then you think.

When the IRS Record Is Wrong: The Amended Return Strategy

Okay, so heres were things get real for alot of people.

What if your IRS transcript shows $0 gross receipts, or what if you…didn’t file a tax return at all for the eligibility year? Maybe you thought you didn’t have to file because your income was below the threshold, or maybe you just messed up and forgot, or maybe you filed but made a mistake on the return. Your sitting there looking at this denial letter, and your thinking, “I’m screwed. I can’t fix the past.”

Breath.

You can fix this. The IRS allows you to file amended tax returns, and the SBA has to accept corrected IRS transcripts even if there filed years after the fact. This is a completeley legal strategy, and its not fraud—its fixing a mistake. Alot of business owners panic and think, “If I file a amended return now, won’t that make me look guilty?” No. It makes you look like someone who’s fixing a error. The IRS has a whole process for this (Form 1040-X for individuals, Form 1120-X for corporations), and millions of people file amended returns every year.

Here’s when you use the amended return strategy: if your original tax return showed $0 gross receipts (or very low receipts that don’t match your actual activity), or if you didn’t file a return at all, or if you filed but didnt include a Schedule C for your business. In any of those scenarios, you can file a amended return to correct the record, and then use the updated IRS transcript in your SBA reconsideration.

The Form 1040-X Process (For Sole Proprietors and Single-Member LLCs)

If your a sole proprietor or single-member LLC (which is treated as a sole prop for tax purposes), you’ll file Form 1040-X to amend your personal return. Heres the step-by-step:

1. Get your original return—If you filed one, get a copy. If you didn’t file, your gonna file a original return first and then amend it if needed (or just file late).
2. Prepare Form 1040-X—This form has three columns: what you originally reported, what the correct amount should be, and the difference. You’ll also attach a corrected Schedule C showing your actual business income and expenses.
3. Include all supporting documents—Attach copies of invoices, bank statements, 1099s you recieved, anything that supports the income and expenses your now reporting. The IRS wants to see that your not just making up numbers.
4. Pay any additional tax owed—If your amended return shows you owe more tax then you originally paid, you need to pay it along with penaltys and interest. Yes, this sucks, but it proves good faith. Your showing the IRS (and the SBA) that your correcting a mistake, not comitting fraud.
5. Mail the amended return—Form 1040-X has to be mailed, you can’t e-file it. Send it to the IRS address listed in the form instructions, and sent it certified mail so you have proof of mailing.
6. Wait—This is the hard part. The IRS takes 6-12 months (sometimes longer) to process amended returns. During this time, your in limbo with the SBA.

While your waiting for the IRS to process the amendment, you should contact the SBA and let them know what your doing. Send a letter that says something like, “I recieved your denial based on IRS transcript showing $0 gross receipts. I have discovered a error in my original tax filing and have submitted Form 1040-X to correct it. I request a extention of the reconsideration deadline untill the IRS processes the amendment and I can provide the updated transcript.” The SBA doesn’t have to grant the extension, but alot of times they will, especially if you provide proof that you’ve actually filed the 1040-X (include a copy of the form and the certified mail reciept).

The Corporate Return Fix (For S-Corps, C-Corps, and Partnerships)

If your business is a corporation or partnership, the process is similer but uses different forms. S-corps and C-corps file Form 1120-X to amend there corporate return. Partnerships file Form 1065-X. The concept is the same—your correcting the gross receipts, income, and deductions to reflect what actually happened.

One thing to watch out for with corporate returns: if you change the corporate return, you might also need to amend the K-1s (for S-corps and partnerships) that flow through to the owners’ personal returns. This can get complicated, so if your dealing with a corporate entity, it might be worth hiring a CPA to handle the amended filing. Mistakes on amended corporate returns can trigger audits, and you don’t want to create new problems while trying to fix the SBA issue.

What To Do While Waiting for IRS Processing

So you’ve filed the amended return, and now your waiting 6-12 months for the IRS to process it. What do you do during that time?

First, don’t just sit there. Gather all your other documentation (bank statements, invoices, etc.) so that when the IRS transcript updates, you can immediately file a complete reconsideration package with the SBA.

Second, maintain some level of communication with the SBA without saying anything that hurts you. You don’t want them to think you’ve dissapeared. Send a brief update every 60-90 days: “I’m following up on my previous letter regarding the amended tax return. The IRS is still processing. I’ll provide the updated transcript as soon as its available.” Keep it short and factual.

Third—and this is important—don’t admit fault or use language that makes it sound like you did something wrong. Your not apologizing for fraud; your correcting a filing error. Theres a difference. Say “I discovered a discrepancy in my original filing” or “There was a error in the gross receipts reported,” not “I lied on my tax return” or “I didn’t report my income.” Words matter, especially if this ever escalates to a investigation.

After the IRS Processes Your Amendment

Once the IRS processes your amended return, you’ll get a notice from them. At that point, request a new Record of Account transcript from the IRS. This updated transcript should now show the corrected gross receipts. Take that transcript and immediately file a formal reconsideration with the SBA. Your cover letter should say:

“I am resubmitting my application for reconsideration with updated documentation. My original denial was based on a IRS transcript showing $0 gross receipts. I have since corrected a filing error with the IRS, and the updated transcript (attached) now reflects $X in gross receipts for [tax year]. This demonstrates that my business was in operation during the eligibility period. Also attached are [list other supporting documents].”

Keep it straightforward. Your not asking for sympathy; your providing proof.

Look, I’m not gonna lie to you—the amended return strategy is a long game. It can take over a year from start to finish. But if your IRS transcript is the core problem, and you have actual operational activity that just wasn’t reported correctly, this is your path. Its tedious, its slow, but it works. I’ve seen it work. And the alternative—just accepting the denial and the repayment demand—is worse.

The Appeals Ladder: From Reconsideration to Ombudsman

So you filed your reconsideration with all your documentation, and…the SBA denied it again.

Now what? Do you just give up?

Hell no. You’ve got more options, and most business owners don’t even know these exist. The SBA has multiple levels of review, and each level gives you another bite at the apple. Here’s the ladder, from bottom to top:

Level 1: Standard Reconsideration (First Appeal)

This is were you probly are right now. You got the denial letter, you have 30 days to submit a reconsideration request, and you send all your evidence to the same loan officer or district office that denied you. This is your first shot. Success rate for first reconsiderations is around 10%, which sounds low, but remember that alot of people submit weak evidence or miss the deadline. If you’ve got strong Tier 1 documentation, your odds are better.

The key to a good first reconsideration is being specific. Don’t just say “I was operating.” Say: “I was operating during the period of January 1, 2019 through March 31, 2019, as evidenced by the attached IRS transcript showing $47,000 in gross receipts, Form 941 showing payroll activity, and 12 customer invoices totaling $38,000 with corresponding bank deposits.” Give them the facts, make it easy for them to approve you.

Level 2: Second Reconsideration (Different Officer Review)

If the first reconsideration gets denied, you can request a second reconsideration and ask for it to be reviewed by a different loan officer. This is were alot of people don’t realize they can push back. The SBA doesn’t advertise this, but you have the right to request re-review. Send a letter (or email) to the district director (not just the loan officer) and say: “I respectfully request a second reconsideration of my loan application, to be reviewed by a different officer then the one who handled the first reconsideration.”

Why does this matter? Because loan officers are human, and sometimes they get stuck on a initial impression. A fresh set of eyes might see your evidence differently. Also, if you’ve obtained new evidence since the first reconsideration (like that updated IRS transcript we talked about), you can introduce it here. The second reconsideration success rate is around 15%—still not great, but better then the first.

Level 3: SBA Office of the National Ombudsman (The Secret Weapon)

Alright, here’s were things get interesting. Most business owners—and even most attorneys—don’t know about the SBA Office of the National Ombudsman. This is a seperate office within the SBA that has statutory authority to investigate and resolve disputes between small businesses and the agency. Its like a internal watchdog. And the best part? The success rate for Ombudsman complaints is around 35%, which is way higher then standard reconsiderations.

The Ombudsman office is designed to address situations were the SBA is being arbitrary, unfair, or inconsistant in enforcing regulations. If you’ve been denied twice and you genuinely believe the SBA is applying the “in operation” standard unfairly, this is your move. You file a complaint online at sba.gov/ombudsman, and the complaint goes to a different division of the SBA for review—not the same people who denied you.

Here’s how to structure your Ombudsman complaint:

1. Describe the issue clearly—”I applied for a PPP loan. The SBA denied my reconsideration, claiming my business wasn’t in operation during Feb 2019-Feb 2020. I have provided IRS transcripts, bank statements, and payroll records proving operations.”
2. Cite the specific regulation—Reference 13 CFR 120.110 or whatever the applicable regulation is for operational requirements. Show that you meet it.
3. Explain why the SBA’s determination is arbitrary—”The SBA has not explained why my IRS transcript showing $50,000 in gross receipts is insufficent to prove operations. Other businesses with similer documentation have been approved.”
4. Request a regulatory fairness hearing—The Ombudsman can convene a hearing were you present your case. Its not a court trial, but it gives you a forum.
5. Attach all your documentation—Provide everything in a organized package. Make it easy for the Ombudsman staff to see that your in the right.

The Ombudsman has a 90-day response requirement, which creates timeline pressure on the SBA to actually deal with your case instead of letting it languish. I’ve seen situations were the Ombudsman’s involvement alone causes the SBA to reverse a denial, because nobody wants the Ombudsman to find that they was applying standards unfairly.

When should you go to the Ombudsman? After your first reconsideration is denied, before you spend money on litigation. Its a free, no-attorney-required process, and its worth trying. The worst case is they side with the SBA, and your no worse off then you was before.

Level 4: When To Consider Litigation

If you’ve exhausted reconsiderations and the Ombudsman didn’t help, and your loan amount is high enough to justify the legal costs, you might consider federal litigation. This usually means filing a lawsuit in federal court seeking either (1) a declaratory judgment that your business was operating and the SBA’s denial was arbitrary, or (2) a challenge to the personal guarantee based on the SBA’s failure to properly verify eligibility before funding.

Litigation is expensive and slow. Figure $20,000-$50,000 in attorney fees for a case that goes to trial. So you need to do a cost-benefit analysis. If your loan was $300,000 and the SBA is demanding repayment, spending $30,000 on a lawyer might be worth it. If your loan was $30,000, litigation probly doesn’t make financial sense.

One angle that sometimes works in litigation: arguing that the personal guarantee is unenforceable because the SBA failed to verify your operational status before approving and funding the loan. Basically, your saying, “If the SBA is right that I wasn’t operating, then they shouldn’t have given me the loan in the first place, which means the loan contract—including the personal guarantee—is void.” This creates a paradox for the SBA: they have to either admit they screwed up the verification (and lose the guarantee), or admit you was operating (and drop the claim). It doesn’t always work, but its a leverage point in settlement negotiations.

There’s also been some class action activity around SBA denials, especially for pandemic loans. If your situation fits a broader pattern (like the SBA systematicaly denying seasonal businesses or misapplying the 12-week rule), you might be able to join a class action. Google “[your state] SBA PPP class action” and see if anythings out there.

The Personal Guarantee Question and What Happens Next

Lets talk about the elephant in the room: the personal guarantee.

If the SBA ultimately decides your business wasn’t operating and demands repayment, your personnally on the hook for the full amount because you signed that personal guarantee when you took the loan. For alot of business owners, this is the scariest part—the idea that the SBA can come after your house, your savings, your personal assets.

Here’s the reality: yes, they can. The personal guarantee makes you liable for the debt if the business can’t pay. But—and this is important—the personal guarantee is only enforceable if the underlying loan contract is valid. If the SBA is claiming you wasn’t operating, their essentially saying the loan was fraudulently obtained. And if the loan was fraudulent, then the contract is voidable, which means the personal guarantee might not be enforceable either. This creates legal leverage.

If your facing a repayment demand on the personal guarantee, you have a few options: (1) negotiate a settlement or payment plan, (2) challenge the validity of the guarantee based on SBA’s failure to properly verify eligibility, or (3) consider bankruptcy as a last resort.

Settlement/Payment Plan: The SBA doesn’t want to chase you forever. If you offer a lump sum payment thats less then the full amount, or a payment plan over several years, they might take it. This is called an “offer in compromise.” You’d work with a attorney to submit a proposal showing your financial situation and what you can realistically pay. The SBA will consider it if they think its better then trying to seize assets or sue you.

Legal Challenge: If you genuinely believe the SBA is wrong about your operational status, you can file a declaratory judgment action in federal court asking the court to rule that the personal guarantee is unenforceable. This is aggressive, and you need a lawyer, but it forces the SBA to prove there case in court instead of just demanding payment.

Bankruptcy: This is the nuclear option. If your truly unable to pay and the SBA is threatening to seize assets, bankruptcy might discharge the debt (depending on the type of bankruptcy and whether the SBA claims fraud). Talk to a bankruptcy attorney before going this route, because it has major long-term consequences for your credit and financial life.

One thing to keep in mind: the SBA has a statute of limitations on pursuing these cases. For civil fraud claims, its typically 6 years from the date of disbursement. So if you got a PPP loan in 2020, the SBA’s deadline to sue is around 2026. If your close to that deadline and the SBA hasn’t taken action, they might not. But don’t count on it—keep fighting while you can.

Look, I’m not gonna sugarcoat this—if your at the point were the SBA is demanding repayment on the personal guarantee, your in a tough spot. But your not out of options. You can fight the underlying determination, you can negotiate, you can use legal leverage. And alot of times, the SBA would rather settle then spend years in litigation. The most important thing is don’t ignore it. Business owners who recieve demand letters and just hope it goes away end up with liens on there house or wage garnishments.

If you engage, if you fight smart, if you use the tools available (reconsideration, Ombudsman, legal challenges), you’ve got a real shot at a better outcome. Thousands of businesses are dealing with this in 2025 as the SBA works through post-COVID audits. Your not alone. Get help if you need it—talk to a SBA attorney, a CPA, a SCORE mentor, whoever. But don’t give up.