There are many businesses that applied for an SBA loan with the EIDL (Economic Injury Disaster Loan) during the period of COVID-19. You are certainly not alone if your business is also among them.
According to a report, as of January 2023, the payments that were coming in place of those loans have stopped. Now, 1.6 million out of the 4 million small businesses that were able to receive these loans have to make repayment of their loans. It is because of the end of the deferment** on the 1st of January, 2023.
(**The term deferment implies the putting off of the loan to a later period or, in simple terms, postponement.)
Now, the situation raises one question, “What happens to the SBA Loan if the business closes down?” Will it be deferred, or will the repayment come from the personal assets of the business owner? Let’s find out!
Is your business among many businesses that have closed down due to the Coronavirus pandemic? Do not worry, as we will be breaking down how it is possible to handle the SBA EIDL loan in three simple steps.
1st Step: Understanding The Purpose Of SBA EIDL
In order to get out of the situation, it is important to first get an understanding of what the loan from EIDL was for. The purpose of an SBA loan from EIDL was to cover the operating expenditure and meet the financial obligations of the business. The allowance of the loan was to cover the finances from COVID-19 if it had not occurred. However, it is evident that these losses occurred. Thus, it became the need of the hour for the economy to provide critical support to small businesses.
The support offered to the businesses had funds to cover six months’ worth of business working capital. With the continuation of the pandemic, the assistance limit was also increased. The increase of funds was up to 24 months’ worth of working capital for the business.
The usual term available for the Economic Injury Disaster Loan is 30 years. It means that they are made to be paid back and not forgiven. It is why the repayment period is large enough, giving a lot of windows for any small business. At the same time, this repayment factor is enough to create problems for the business.
2nd Step: Identification Of The Loan Amount
Now that you have an understanding of what the SBA EIDL was for, the next is to look for an answer to what would happen to a business if it closed down. Well, there is no single answer as to what happens will take into account the loan amount and its expenditure status.
The consequences for smaller loans are usually lower. Let’s look at the consequences of the loan amount.
For an amount less than $25,000
If the loan amount was less than $25,000, the risk is almost negligible to your business. For such a small amount of loan, there is no requirement for a guarantee or collateral, even if the business closes. The worst that can happen is the seizure of assets that the federal government holds, such as income tax refunds. However, there is no danger to the personal assets.
For an amount greater than $25,000 and less than $200,000
For a loan amount in the range of $25,000 and $200,000, the requirement of collateral by the SBA is a given. If the business closes in this case or defaults, the SBA has the authority to seize the assets of the business. It can include seizing the building, vehicles, or any machinery if the business holds any of these.
For an amount greater than $200,000
A business that applied for a loan amount of over $200,000 has to put forth a personal guarantee. It means that the business owner will be personally responsible for all the finances.
So, suppose the business which is liable to pay back more than $200,000 closes down. In that case, the business owner’s personal assets and the collateral are on the line.
3rd Step: Figure Out The Best Way Of Handling The SBA Loan If the Business Is Closing
Once you know what is on the line if your business is closing down, the next would be to figure out the best course of action to minimize the losses. You could have gone for Subchapter 5 of Chapter 11, Bankruptcy** if your business was not closing. However, since that option is no longer viable for the closing ones, they must look for other ways to handle the loan.
**Under Subchapter 5 of Chapter 11, Bankruptcy, owners of small businesses get the option of reorganizing their debt and forming a plan accordingly to pay off the portion which is left while shutting down business operations.
There was another option of Offer-in-Compromise**, which is also not available as of Jan 2023. Now, the last option left for the business would be to declare Bankruptcy. It can do so in the following ways.
(** An Offer-in-Compromise is simply the tax debt settlement for an amount that is less than the amount you owe.)
Going for Bankruptcy would be the option for your business if it is sure to close down. It would ensure that, at least, there is no severe impact on the personal assets of the business owner.
Any business that faces difficulty in paying a lump sum amount of SBA EIDL can look for the option of Business Bankruptcy. If we become more specific, Chapter 7 Business Bankruptcy will provide aid. It works in liquidating and minimizing the compulsory debt amount. Doing so will help the business unless the amount of the SBA loan is very high.
For a business owner who used up a personal guarantee for a hefty amount of loan, personal Bankruptcy would be a wise choice. It is a hard choice to make as there is a lot of internal involvement as well as the support of your attorney. However, most of the time, going for personal Bankruptcy reduces the majority of the leftover debt from the SBA EIDL. Although, the final decision is still for the business to make, and anyone involved in the process should pay due diligence instead of rushing.
With that aside, there are some bankruptcy types that will reduce the debt amount. These are
- Chapter 7 Personal Bankruptcy is one of the options which usually eliminates all of the loan amounts under the SBA EIDL.
- Chapter 11 and Chapter 13 Personal Bankruptcy is another choice that can erase most of the debt amount.
The repayment process of an SBA loan under the condition of the business closing down can be taxing. A business on the verge of closing will encounter many difficult situations; we can say the same for the business owner as well. If your business is going to close down and you are finding it difficult to repay or going bankrupt, Alnicor Consulting’s Business solutions can provide you with a much-needed consultation.
We understand your situation and will assist in your debt repayment process in every possible way. Get in touch with our business consultant, and you may find the right alternative that you are looking for. For more information, you can contact us using the following details.
Phone: +1 833-211-177 or +1 833-256-4267
Frequently Asked Questions
Yes, it is possible to transfer an SBA loan after getting approval from the SBA. However, you should know that the process can be quite complicated.