For business owners facing financial hardship, navigating the complexities of a defaulted SBA loan can be overwhelming. At Rise Alliance, we understand that most borrowers want to honor their commitments, but unforeseen circumstances can make full repayment impossible. Fortunately, the SBA provides a structured program—the Offer-in-Compromise (OIC)—designed to help borrowers negotiate a reasonable settlement and avoid bankruptcy.
A common question we hear is: What is the minimum amount I can settle for? The answer is not straightforward, as each OIC is a negotiation that must be handled strategically. Ultimately, the settlement amount is based on what the lender could realistically recover through forced collection methods. Here’s a breakdown of how lenders assess an SBA loan OIC.
What Happens When an SBA Loan Defaults?
When an SBA loan goes into default, creditors attempt to recover as much of the outstanding balance as possible. Initially, this involves liquidating the business entity’s assets. However, because SBA loans typically require personal guarantees, lenders also look to the individual guarantors for repayment. It’s important to understand that all guarantors are jointly and severally liable—meaning any one of them could be pursued for the full balance.
Key Factors in OIC Calculations
Lenders consider several factors when determining an acceptable settlement amount. The four most significant are:
- Value of Current Assets
Lenders assess your financial worth by evaluating assets such as home equity, cash, investments and personal property. State exemptions may protect some assets, but creditors will still consider your overall ability to pay. If significant assets exist, lenders will expect a higher settlement offer. - Future Earning Potential
Your employment status, earning history, age, and health are all considered when determining how much you can pay over time. Lenders analyze whether they can garnish wages and what the expected return would be versus accepting a lump sum settlement. - Cooperation and Character
Demonstrating good faith throughout the process significantly impacts your settlement terms. Providing accurate financial documentation, working with appraisers and maintaining open communication can lead to more favorable outcomes. Ignoring creditors or delaying responses may result in a less flexible settlement offer. - Cost of Collection
The legal and administrative costs of pursuing full repayment play a role in negotiations. Lenders often prefer a reasonable lump sum settlement over a prolonged and costly collection process.
Preparing a Strong OIC Proposal
Submitting a well-documented OIC proposal increases your chances of approval. While the SBA officially requires forms 770 and 1150 and two years of tax returns, providing additional financial documentation can strengthen your case. Supporting materials, such as mortgage statements, bank records and a compelling hardship letter, help paint a complete picture of your financial situation.
Get Expert Guidance
Successfully negotiating an SBA loan OIC requires careful planning and strategic negotiation. While these guidelines provide a general framework, every case is unique. Rise Alliance strongly recommends seeking expert representation to navigate the process and achieve the best possible outcome.
If you’re facing SBA loan default and need assistance with an Offer-in-Compromise, Rise Alliance is here to help. Contact us for a consultation and take the first step toward financial resolution.
