Today we bring you a guest post by Jason Vanick, Chief Technology Officer of Princredible Inc, a contract screen print and embroidery shop.
Our thanks to Jason for sharing his wisdom on SBA loans, which is based on personal experience. We hope this information helps you make an informed decision if this is one of the emergency measures you are considering.
So you’re looking for a loan to help your business survive and you’ve heard about government-backed SBA loans as a possible option. They look good due to lower interest rates and ease of approval compared to traditional bank loans. Maybe you’re suffering due to this natural disaster and this seems like the only way out. I’m here to tell you that unless you can absolutely guarantee your business is going to succeed, these loans are a bad decision.
Unlike traditional bank-backed loans, SBA loans are backed by the US Treasury. You may hear the banker say that there’s a 85% guarantee on the loan amount. You then think that you’ll only be liable for 15%. This is not the case at all. It means that the US Treasury protects the bank to that amount, which means the bank is protected, but those protections don’t extend to you. You may think that you can declare bankruptcy and that at least part of the loan will be forgiven. This is also not the case.
When you originate a SBA loan, you are required to sign a personal guarantee. This means usually pledging, at a minimum, your house as collateral. This personal guarantee is where things get sticky because the SBA personal guarantee does not go away in bankruptcy.
So if your business fails for any reason, despite the loan, after some period of time after the default, your loan will get referred for collection to the US Treasury. The Treasury has the ability to garnish your wages, foreclose on collateral like your home, collect any federal tax refunds owed to you, and even collect money from your future social security wages. These actions will follow you until the debt is paid off, which may be the rest of your life.
Is there any way out? The US Treasury does allow for making what is called an “Offer in Compromise” or OIC. This is a negotiation between the debt holder and the government to pay a portion of the amount owed. However, if you are actively employed, your chances of an OIC being accepted are as good as winning the lottery. Think twice or maybe even a dozen times about an SBA loan to help you out of the pandemic situation.