You’ve been late on your small business loan a few months now when the phone call comes. You initially think it’s just your loan office calling once again to try to squeeze some blood from the stone. But this time it is someone else from the bank…someone from the bank’s “Workout Group.”
Sometimes the name is not “Workout Group.” It might the Asset Recovery Department, or the Troubled Loans Team, but whatever the group name is, it spells trouble for the business owner.
So what is the workout group? Simply put, it is where the bank put’s troubled loans that must be “worked out”. In the case of an SBA loan, that almost always means liquidated. Why, you ask? Because all of the financial motivations and incentives drive the bank to that result.
The simple truth of the matter is that the very existence of the SBA guarantee is an overriding force that drives the bank to the conclusion that it is better to liquidate and get their guarantee paid off quickly, rather than work with you to see if you can turn around the situation.
The SBA rules and regulations are very strict, and place very restrictive limits on what your bank to do to help you through a difficult time. These rules were put in place to ensure that the bank does not favor one borrower over another (anyone remember the S&L crisis?) However, they have the effect of forcing banks to kill and liquidate businesses that could be saved by a more flexible approach.
Typically once your company has been put in the “Workout Group” they will do a quick assessment as to your viability to survive. If they think you have a chance, they will give you a 3 or 6 month interest-only payment plan. After that, if you are unable to go back to full payments, it’s lights out.
The bank will be forced to aggressively pursue their loan, and if you are unable to pay it, they will shut the business down, foreclose, and sell off the assets in liquidation.
Some business owners think that is the end of it. The bank liquidates the business, sells the assets, and then collects their guarantee from the SBA. Wrong. That is just the beginning for you.
After paying the bank, the SBA will now pursue you for the full balance of the loan deficiency, and will use all legal methods available to collect on this deficiency, including referring the loan to the Department of Justice for prosecution and collection. Not a fun process.
However, there are alternatives. You can work with the bank and get them to settle these deficiencies for pennies on the dollar, if you know how. See my other articles on the SBA Offer In Compromise process for more on that topic.