SBA Debt Workout
An SBA workout is like any other debt workout. The goal of the workout is to remove as much of the burden of the debt load and debt service as possible from both the business and the guarantor while preserving the business opportunity (when possible). Workouts take many forms and there is no cookie-cutter way to effectively conduct a workout. Workouts do require a level of risk and there are many things that need to be considered before entering into a workout. Some circumstances worth considering are:
– Liquidated value of business assets: What are the business asset worth and how much of the debt would be covered by liquidating them for the benefit of the SBA creditor?
– Current and projected business performance: How much cash flow can the business afford to service debt with? Can the owner afford any more cuts? Is revenue climbing or falling? Do projections show improvement in the short-term? Is loan modification possible given the financial capability of the business?
– Current industry trends: Is the industry expanding or is the market constricting? Are their external forces affecting business operations?
– Size of the SBA obligation: Is the loan so large and under collateralized that it scares away most potential buyers or investors? Is the loan so small that the debtor will be left personally responsibly for all shortfall liability?
– Personal net worth of guarantors: Does the guarantors show a large amount of equity in their home? Do they have other liquid and unprotected assets?
– Additional collateral for SBA loan: Did the guarantors pledge additional collateral for the loan? Is there a lien on real property? Is there cross-collateralization with another operating business?
Understanding these points of interest will help a defaulted borrower calculate the true costs of a SBA secured debt workout. The results from a successful debt workout are pretty incredible. Guarantors settle their outstanding obligations, businesses survive and are in some cases restructured in order to preserve jobs and opportunity, and the banks satisfy their SBA obligations and receive their SBA guaranty. However, workouts have costs and some businesses are not financially strong enough to support the requirements of a workout. A full assessment and valuation of all relevant business factors should be done before any small business owner enters into a workout with a SBA lending bank.
Because the bank has its SBA guaranty to protect, lenders do not often have the same level of flexibility when it comes to modifying or altering SBA loans. Therefore they follow a strict path of liquidation which is regulated by the SBA Standard Operating Procedures for loans in default. This path traditionally means litigation, foreclosure, and auction of the business followed by a pursuit of the guarantor to collect the deficiency. Workouts offer alternatives to both lenders and debtors that meet all of the SBA requirements but do not require litigation, foreclosure, or bankruptcy. Understanding how to satisfy the SBA requirements is what’s key to success.
Overall a SBA debt workout is a business strategy that is meant to preserve the business opportunity while removing debt from both the business operation and the guarantors. Defaulted SBA borrowers who do not qualify for loan modification are candidates for a workout. However the costs associated with a workout vastly vary based on the circumstances surrounding each loan, each business and each guarantor.
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