Steps for Protecting Your SBA Guarantees During the Special Assets Workout Process

As a small business lender, one of the more challenging scenarios you may face occurs when a borrower is in default on a U.S. Small Business Administration (SBA) loan. In these cases, the loan hasn’t been paid for 90 days or more, which triggers an SBA default and the special assets workout process.

Although an SBA default is a difficult situation for lenders and borrowers alike, it’s important to know that the vast majority of SBA loans are repaid as agreed. When an SBA default does happen, though, there are clear steps to take so that lenders can protect their loan guarantees during the workout process.

What is an SBA loan workout?

A special assets workout, or loan workout, is the debt collection and negotiation process that takes place with an SBA default. SBA loan workouts are conducted to determine how the defaulted debt will be settled, either through modifications or intensive servicing, as well as the final plan that a lender and borrower agree upon. (SBA SOP 50 57 2). As the SBA states, “a workout agreement restructures the material terms and conditions of the debtor’s delinquent loan in order to:

• avoid the need for actions such as foreclosure or bankruptcy
• enable the debtor to cure defaults and improve repayment ability; and
• to enable the creditor to maximize recovery on the loan.

It’s important to note that loan modifications are only considered when the borrower is experiencing short-term problems. Examples include construction in front of the business (which limits access to the business and causes cash flow issues), a hacked bank account, etc. Oftentimes, SBA defaults are due to longer-term business issues such as business closures, bankruptcy filings, landlord eviction of business premises, or tax foreclosure of commercial properties. In either case, our team is here to take the proper steps to ensure your SBA guarantee is protected.

More about the workout process

In this Q&A, we asked Morgan Petzold, Assistant Vice President, Special Assets, about the workout process, including what to expect and the necessary steps lenders must to take to protect their guarantee.

Q: What triggers the special assets workout process?

A: Unlike loan delinquency, in which a borrower is typically late on a payment but does pay, the workout process is triggered when a borrower defaults on an SBA loan by missing several payments, usually over 90-120 days. The cause may vary – sometimes, it’s operational issues and other times, it’s the result of unfortunate circumstances such as a long-term illness. In any case, the outcome is that the business isn’t paying back the loan as agreed.

For lenders and borrowers alike, there are SBA default consequences, but we can help make the process easier and more efficient for lending partners to help minimize any negative impacts.

Q: What’s the first step that a lender needs to take in the workout process?

A: The first step is to determine the loan’s status and, specifically, how far it’s past due and whether it was sold on the secondary market.

Prudent Lenders makes this easy with a ‘Past Due Questionnaire.’ It can be filled out and submitted online. Once we receive it, our team will use this to assess the loan’s status and determine the best ways for lenders to move forward.

Q: Once the loan’s status is determined, what’s next?

A: Once we know the loan’s status, we’ll talk through next steps with the lender. They typically include actions that are required by the SBA, like conducting site inspections to establish the status of all collateral.

We’ll also connect with our loan-modifications department, who will help determine whether a loan is eligible for payment deferral or modifications. If so, then we may be able to work out a solution that helps the borrower get back on track with payments. When that happens, Prudent Lenders will closely monitor the loan to ensure compliance with SBA operating procedures.

Q: What if modifications or deferrals aren’t an option?

A: If it looks like a loan can’t be saved through modifications or deferrals, or if it’s been sold on the secondary market, we’ll review other options, such as liquidation and, if needed, litigation, with our lender.

Q: Are SBA loan defaults common?

A: It’s important to know that SBA loan defaults are rare. And, just as important, know that when they do happen, we’re here to support you. We have industry-leading experience and we’ll ensure that the workout process is handled correctly and efficiently. And we’ll be with you through every step to find the best solution for you.

Contact us as soon as issues arise

When an SBA loan is in distress, don’t hesitate to contact us. Being proactive will help keep your SBA guarantee protected.