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The Best Practices for a Workout on a SBA Loan in Liquidation

Posted by Lance Sexton in News with No Comments

When a SBA Loan goes into liquidation, enforced collection is not always the best option.  Frequently, you will have a cooperative borrower who wants to find a way to make their business work and wants to repay the SBA Loan.  This is a good situation to consider a workout on the SBA loan.  A workout is described in SOP 5057 as the debt collection and negotiation process as well as a final plan agreed upon by the creditor and the debtor with regard to how the problems and issues surrounding the debtor’s delinquent obligation to the creditor can be worked out or resolved.  The SBA SOP 5057 indicates that whenever feasible, a good faith effort should be made to negotiate a workout on a SBA Loan in liquidation.  Once the bank feels that it would be prudent to pursue a workout, it is very important to understand the SBA requirements for a workout.

The first thing that the bank must do is collect information from the debtor.   Collection of current financial statements on the guarantors and the borrower is paramount to a good prudent lending decision on a SBA Loan Workout.  You need to collect the following:

  1. Current personal financial statements on the guarantors.
  2. Federal Tax Returns on the Guarantors for the past two years.
  3. The Borrower’s last year end financial statements.
  4. Year End Financial Statements on any affiliate businesses.
  5. Complete Business Federal Tax Return for the past two years

Once we have collected the aforementioned information, we must determine the feasibility of the proposed workout plan.  This would consist of requesting a written plan from the borrower on how they are going to improve their business and their business’s cash flow.  You need a borrower with competent management skills, who is cooperative, acting in good faith, and you have reviewed their projections and find them viable.

After we have determined that the workout plan is feasible, timing becomes important.  The SBA SOP 5057 indicates that an acceptable workout plan should be in place within 60 days of the start of negotiations.  You do not want to drag this process out because time without change will only magnify the problems.

There is a requirement from the borrowers and guarantors in any SBA workout agreement.   The borrower and guarantors must provide consideration on a workout plan. They must agree to:

  1. Correct Loan Document Errors.
  2. Waive defenses.
  3. Release lender liability claims.
  4. Provide additional collateral if possible.
  5. Consent to a speedy and inexpensive liquidation if the workout plan fails.

The workout plan should be a formal agreement not an oral agreement.  The agreement must be in writing and include the following:

  1. List of events of default to date.
  2. List the consideration provided for the agreement.
  3. Confirm all of the collateral on the loan.
  4. An acknowledgement that the bank and SBA are not waiving any default.
  5. List the agreed upon workout provisions.
  6. List the forbearance period.
  7. List what constitutes a default under the workout agreement.
  8. List the consequences of default under the workout agreement.
  9. Have all guarantors and borrowers and the bank officer sign the agreement.

It is important to note that SBA does not have to approve the workout agreement.  There can be possible servicing actions related to the workout agreement that may need SBA’s approval but the workout plan and agreement needs to be a good prudent lending decision by the bank.

The best outcome for the Bank and the SBA is for a workout agreement to be successful and the borrower continue to pay back the SBA loan.  The primary objective of a workout agreement should be for the loan to eventually move back into regular servicing.  Remember, a Workout on a SBA Loan does not have to be approved by SBA, but it does require that you follow the requirements provided by SBA SOP 5057.

If you have questions about a SBA Workout Plan or the servicing of a nonperforming SBA loan, do not hesitate to contact me at lsexton@prudentlenders.com.

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