An SBA loan is a U.S. Small Business Administration loan. Although it is a loan brokered by a branch of the government, it IS dischargeable in bankruptcy (bankruptcy can wipe out that debt). I am including definition information from the SBA at the end of this blog. To clarify, the SBA loan is NOT a priority debt which is non-dischargeable in bankruptcy.
So, if you have taken out an SBA loan to start your business, and the business failed, then you CAN go bankrupt on that loan. Just remember that most SBA loans are secured. For instance, if you take out an SBA loan to start a towing business, then the two tow trucks you purchased for your business are going to be secured by the loan. If you list the loan in the bankruptcy to discharge it, they will take back the trucks. I have even had some clients who secured the SBA loan as a second mortgage against their home. This means that they would have to keep the loan to keep their home (unless we could strip it off in a chapter 13 case).
So you can list the loan, and you can discharge it, but you’ll lose whatever collateral was secured by the loan. Don’t sell off the equipment or business fixtures secured by the loan: the SBA lender has a legal right to take those back.
What SBA Offers to Help Small Businesses Grow
What does SBA offer to small business owners? The programs are many and varied, and the qualifications for each are specific. SBA can help facilitate a loan for you with a third party lender, guarantee a bond, or help you find venture capital. Understanding how SBA works is the first step towards receiving assistance.
SBA provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing.
Guaranteed Loan Programs (Debt Financing)
SBA does not make direct loans to small businesses. Rather, SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and microlending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. So when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.
SBA loan guaranty requirements and practices can change as the Government alters its fiscal policy and priorities to meet current economic conditions. Therefore, you can’t rely on past policy when seeking assistance in today’s market.