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Message
Dealing with SBA / local bank on loan for business closing due to COVID
Posted on 2/13/21 at 10:12 am
Posted on 2/13/21 at 10:12 am
Some family members of mine own a business that has been greatly impacted by the COVID restrictions. They were shut down for seven months by state order (not in Louisiana), and then allowed to open in limited capacity. The business was doing great pre-COVID to the point where they were consindering opening a second location. This summer would have made 7 years.
They are in a line of business that with the current virus fears, still a lot of people are hesitant to visit. Their January revenue was down 80% to last January.
After a lot of soul searching and investing considerable personal sums into the business over the last year, and with no clear path of when things might return to normal, they have decided they can no longer put personal funds into the business, and will be shutting down within the next few weeks.
The landlord is in the process of selling the building in which they are located, and the new landlord wants to evict all current tenants, so they have an agreement in which as long as they depart by mid-March, no additional monies will be owed either way.
We anticipate selling the assets will provide enough cash to pay off the remaining debts of the business, with the exception of about $25,000 remaining on the SBA loan that was taken to start the business, and has three years remaining.
They took advantage of the 6 months where SBA paid their loan, and are eligible for the 3 month extension, which will cover Feb - Apr.
Beyond that, they signed a personal guarantee when they got the loan. Does anyone have any experience negotiating this, for a possible reduction/elimination of the remaining amount owed, especially since this failure can 100 percent be attributable to COVID? Is this something that is done via individual bank, or directly with SBA?
Trying to keep this business afloat during the crisis has caused them to liquidate just about all of their savings and investments. Paying off this loan will require them to take an IRA distribution, so clearly trying to minimize that as much as we can.
Thanks
They are in a line of business that with the current virus fears, still a lot of people are hesitant to visit. Their January revenue was down 80% to last January.
After a lot of soul searching and investing considerable personal sums into the business over the last year, and with no clear path of when things might return to normal, they have decided they can no longer put personal funds into the business, and will be shutting down within the next few weeks.
The landlord is in the process of selling the building in which they are located, and the new landlord wants to evict all current tenants, so they have an agreement in which as long as they depart by mid-March, no additional monies will be owed either way.
We anticipate selling the assets will provide enough cash to pay off the remaining debts of the business, with the exception of about $25,000 remaining on the SBA loan that was taken to start the business, and has three years remaining.
They took advantage of the 6 months where SBA paid their loan, and are eligible for the 3 month extension, which will cover Feb - Apr.
Beyond that, they signed a personal guarantee when they got the loan. Does anyone have any experience negotiating this, for a possible reduction/elimination of the remaining amount owed, especially since this failure can 100 percent be attributable to COVID? Is this something that is done via individual bank, or directly with SBA?
Trying to keep this business afloat during the crisis has caused them to liquidate just about all of their savings and investments. Paying off this loan will require them to take an IRA distribution, so clearly trying to minimize that as much as we can.
Thanks
7
Posted on 2/13/21 at 12:04 pm to LSUFanHouston
Have you made sure, based on NAICS code, they only get the 3 additional months of SBA payments and not the 8?
Also, with the 80% revenue decline, does it make sense to stay “open” and get the new round of PPP?
Also, with the 80% revenue decline, does it make sense to stay “open” and get the new round of PPP?
Posted on 2/13/21 at 12:45 pm to RedStickBR
You have to deal directly with the bank. Bank makes the loan, SBA only provides a guaranty if it goes bad.
As a banker, I get it, but they need to repay the debt. Will probably be more costly for the bank to pursue collecting it just for $25k, but they probably will nonetheless if there are personal guarantees. Plus if they (bank) do end up asking SBA to pay their guaranty, they will have to show SBA that they made every attempt possible to collect the debt first including any collateral disposition. .
As a banker, I get it, but they need to repay the debt. Will probably be more costly for the bank to pursue collecting it just for $25k, but they probably will nonetheless if there are personal guarantees. Plus if they (bank) do end up asking SBA to pay their guaranty, they will have to show SBA that they made every attempt possible to collect the debt first including any collateral disposition. .
Posted on 2/13/21 at 2:21 pm to RedStickBR
quote:
Have you made sure, based on NAICS code, they only get the 3 additional months of SBA payments and not the 8?
They got a letter from SBA (could have been the bank though, I didn't actually see the letter) saying 3 months. However, they are in the entertainment and recreation space, so maybe they do qualify for 8 months? Will need to look into that.
quote:
Also, with the 80% revenue decline, does it make sense to stay “open” and get the new round of PPP?
I discussed that with them. They laid off most of their staff and it would be hard to hit the 60% threshhold. Even with the 40% kicker for other eligible expenses, and with the revenue they do have coming in, they would still be short every month. I think they are just frustrated and ready to move on, if they can.
Posted on 2/13/21 at 2:23 pm to Im4datigers
quote:
As a banker, I get it, but they need to repay the debt. Will probably be more costly for the bank to pursue collecting it just for $25k, but they probably will nonetheless if there are personal guarantees. Plus if they (bank) do end up asking SBA to pay their guaranty, they will have to show SBA that they made every attempt possible to collect the debt first including any collateral disposition. .
That makes sense. I was wondering if there were any relaxed guarantees that would allow SBA to pay the guaranty given the situations of the world right now, without having to run the personal guarantors first.
It was a wish =) I have told them they need to be prepared to pay it off personally.
This just all sucks.
Posted on 2/13/21 at 2:43 pm to LSUFanHouston
quote:
They got a letter from SBA (could have been the bank though, I didn't actually see the letter) saying 3 months. However, they are in the entertainment and recreation space, so maybe they do qualify for 8 months? Will need to look into that.
You need to look into it to make sure the bank isn’t overlooking the potential for eight months worth of SBA payments. See below link:
quote:
10. Certain SBA Loans just became much more attractive. If you already have an existing SBA Section 7(a) or 504 Microloan then you can get up to 8 months of forgiveness (3 months plus an additional 5 months if you’re in a hard hit industry such as food service and accommodation, arts, entertainment and recreation, education; and laundry and personal care services) of principal and interest payments – capped at $9,000 per month.
Note that it will ultimately depend on actual NAICS classification, not just the industry they consider themselves to be in.
LINK /
Posted on 2/13/21 at 2:49 pm to Im4datigers
quote:
You have to deal directly with the bank. Bank makes the loan, SBA only provides a guaranty if it goes bad.
Right, I just didn’t know if they could legitimately justify staying open a little longer if certain key expenses can be paid for with PPP 2.0 funds, which might free up a little cash flow to further pay down debt before closing their doors (or maybe even give them one last shot at survival).
Posted on 2/13/21 at 3:01 pm to LSUFanHouston
quote:
Paying off this loan will require them to take an IRA distribution
Some states have protect IRAs from creditors. Perhaps theres a way they can avoid tapping retirement resources especially if it means taking a penalty and paying taxes.
Posted on 2/13/21 at 3:06 pm to TorchtheFlyingTiger
quote:
Some states have protect IRAs from creditors. Perhaps theres a way they can avoid tapping retirement resources especially if it means taking a penalty and paying taxes.
Will have to look into that, thanks. At this point, about all they have left is their personal residence, a couple of old cars, personal effects, and their retirement accounts.
Old enough to avoid penalty but yes would have to pay tax.
Posted on 2/13/21 at 3:08 pm to RedStickBR
quote:
You need to look into it to make sure the bank isn’t overlooking the potential for eight months worth of SBA payments. See below link:
I just had them send me the letter. It is a generic letter from SBA. It states the three months but then also states the language about additional 5 months based on NAICS categories. They are absolutely in one of those eligible classifications.
They will call their bank Monday to confirm, but looks like 8 months it is. That's about a $5,000 difference.
THANK YOU
Posted on 2/13/21 at 3:09 pm to LSUFanHouston
Love this board
Posted on 2/13/21 at 3:12 pm to LSUFanHouston
One last thought:
Could they sell the business to someone who’s willing to eat some losses until the economy fully reopens?
For instance, using fake numbers:
1) Assume it costs $200k to get into their business
2) Assume assets worth $25k
3) Assume $25k in SBA debt
4) Assume monthly cash burn of $5k
5) Assume I think things will reopen fully in 6 months
Using those numbers, I might be inclined to offer them $50k to buy the whole kit and caboodle. On top of that, I’d expect to eat $30k worth of losses before the economy reopens.
Benefits to me: entry cost of $80k if my reopen projections are accurate vs. typical cost of entry of $200k
Benefits to them: enough cash now to payoff debt and they’ve shifted the risk around prolonged shutdowns onto me
Or perhaps I’d give them an $80k non-recourse bridge loan with the clear understanding that the business becomes mine in six months if they default.
Just some ideas. You hate to see a good business shut down over a temporary, black/grey swan event.
Could they sell the business to someone who’s willing to eat some losses until the economy fully reopens?
For instance, using fake numbers:
1) Assume it costs $200k to get into their business
2) Assume assets worth $25k
3) Assume $25k in SBA debt
4) Assume monthly cash burn of $5k
5) Assume I think things will reopen fully in 6 months
Using those numbers, I might be inclined to offer them $50k to buy the whole kit and caboodle. On top of that, I’d expect to eat $30k worth of losses before the economy reopens.
Benefits to me: entry cost of $80k if my reopen projections are accurate vs. typical cost of entry of $200k
Benefits to them: enough cash now to payoff debt and they’ve shifted the risk around prolonged shutdowns onto me
Or perhaps I’d give them an $80k non-recourse bridge loan with the clear understanding that the business becomes mine in six months if they default.
Just some ideas. You hate to see a good business shut down over a temporary, black/grey swan event.
Posted on 2/13/21 at 3:15 pm to LSUFanHouston
quote:
I just had them send me the letter. It is a generic letter from SBA. It states the three months but then also states the language about additional 5 months based on NAICS categories. They are absolutely in one of those eligible classifications.
They will call their bank Monday to confirm, but looks like 8 months it is. That's about a $5,000 difference.
THANK YOU
Posted on 2/13/21 at 3:18 pm to Penn
quote:It's great when it's not looking like a penny stock board
Love this board
Posted on 2/13/21 at 3:24 pm to castorinho
quote:
It's great when it's not looking like a penny stock board
That’s my anecdotal evidence we are in a bubble. Those who’ve been on this board long enough know the penny stock waves come and go. Once this “flight to trash” craze ends, the penny stock threads will all but disappear.Posted on 2/13/21 at 4:21 pm to RedStickBR
Also, what is the Sba loan secured by? Very important to know before you start playing hardball with the bank?
Is it secured by liquid collateral or real estate (ie personal residence) or is there just a UCC lien filed on all business assets?
If it’s just secured by a general ucc lien then they can probably play hardball with the bank and essentially quit paying. Might get sued and/or get a judgement against them, but it will save them having to liquidate personal assets and get a tax hit.
Many options but you have to deal directly with the bank.
Here is one more thought - how much would they qualify for pop round 2? Take the ppp funds and eventually payoff the $25k Sba loan. You’re not supposed to do this, but I’m assuming forgiveness in round 2 is going to be like round 1 where they are essentially going to have to sign a one page document saying they used it for payroll. Take the chance and I doubt they’d get caught on that. Take the ppp round 2 and pay the business loan off.
Might just want to take ppp from somewhere other than the bank the Sba loan is at so it’s not blaring obvious what they’re doing.
Worse case and they have to payback round 2 of ppp. It’s 1% for 5 years so much cheaper than that $25k Sba loan
Is it secured by liquid collateral or real estate (ie personal residence) or is there just a UCC lien filed on all business assets?
If it’s just secured by a general ucc lien then they can probably play hardball with the bank and essentially quit paying. Might get sued and/or get a judgement against them, but it will save them having to liquidate personal assets and get a tax hit.
Many options but you have to deal directly with the bank.
Here is one more thought - how much would they qualify for pop round 2? Take the ppp funds and eventually payoff the $25k Sba loan. You’re not supposed to do this, but I’m assuming forgiveness in round 2 is going to be like round 1 where they are essentially going to have to sign a one page document saying they used it for payroll. Take the chance and I doubt they’d get caught on that. Take the ppp round 2 and pay the business loan off.
Might just want to take ppp from somewhere other than the bank the Sba loan is at so it’s not blaring obvious what they’re doing.
Worse case and they have to payback round 2 of ppp. It’s 1% for 5 years so much cheaper than that $25k Sba loan
Posted on 2/13/21 at 5:27 pm to Im4datigers
I wasn’t suggesting they do anything untoward. Just wondering if a second PPP draw would legitimately allow them to stay open for a bit longer. If they normally have, say, $1,000 in utility expenses anyway, the 40% portion of the PPP loan would allow that to be a 1:1 offset, effectively freeing up $1,000 for other purposes (pay down original SBA loan). If this strategy keeps employees paid for a few more months, it’s consistent with the intent of the PPP program to begin with, and, if they’re lucky, may even allow them to weather the storm.
They can pay employees as much as they need to to hit the 60% threshold, and then the 40% for non-payroll expenses would cover costs they would have had anyway. Combined with the (potentially) 8 months of SBA payments, that may give them a bit more runway.
They can pay employees as much as they need to to hit the 60% threshold, and then the 40% for non-payroll expenses would cover costs they would have had anyway. Combined with the (potentially) 8 months of SBA payments, that may give them a bit more runway.
Posted on 2/13/21 at 5:47 pm to RedStickBR
I get the 60/40 split thing but again, if forgiveness ends up being like round 1 they’re only going to complete a form and sign it. They wouldn’t need to show where the funds went. Worth a try if they truly want to shut it down and be done
Posted on 2/13/21 at 6:47 pm to LSUFanHouston
No advice, but that is really sad and sickening that your family worked so hard to earn a living and the liberals in government ruined it. God bless your family, and I hope they get to reopen one day.
Posted on 2/13/21 at 7:10 pm to LSUFanHouston
That makes me nauseated just reading it. Absolutely sickening. I’m sorry for the loss your family has experienced. All that hard work and money for nothing.
Gone.
Gone.
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