Many clients ask me, “but why won’t the bank just restructure my loan?”
And it makes sense…if the bank would only restructure the loan – maybe stretch out the amortization or reduce the interest rate, your company might survive, and in fact, thrive!
So let’s examine this question…why won’t banks be more flexible when it comes to SBA loans?
The answer is actually very simple. Because the SBA won’t let them.
But why, you ask? Well, now we start to peal back the workings of government programs. Remember, the SBA loan is actually a BANK LOAN which is GUARANTEED BY THE SBA. However, that guarantee is not for you, the borrower, but for the BANK. And since the SBA is in effect bearing some of the risk for the loan, the SBA gets a say in what happens. In fact, the SBA puts significant restrictions on your local bank to ensure that your banker does not play favorites. The SBA only allows the local bank to tweak the terms of the loan for a troubled company – interest only for six to nine months, or possibly stretching the amortization out a couple of years. But these tweaks are not enough to save a business in trouble.
Moreover, if you default on the SBA loan, the SBA pays the bank, not you.
So think about this…if you fall behind a few payments…the bank puts your loan into default, and the SBA sends your bank a huge check. Say what??
So what is the unspoken motivation of the bank? Simple…if you become a problem child, a troubled loan, a high-risk borrower, you suddenly are on the bank’s radar screen as a potential liquidation candidate. With SBA guarantees now approaching 90%, the bank is eager to lend money, and even more eager to liquidate questionable loans (and the associated companies!)
So understand that if you have an SBA loan, and are struggling, that the bank has very little flexibility to modify the loan, and a huge motivation to liquidate your business and run to the SBA for their money.
If you are struggling and would like to talk about your situation, give us a call at 401-390-3801 to schedule a no-cost free consultation.