Your SBA loan is underwater. Here are your options, in the order they tend to come up.

Why this is happening to so many people at the same time

First, you're not uniquely bad at this. From 2021 through 2024, thousands of people bought small businesses, a lot of them first-time owners, with 10% down and a variable-rate SBA 7(a) loan priced off prime. Prime then went from 3.25% to 8.5%. A payment that was comfortable at $9,000 a month became $13,000 a month with nothing else changing. Add a seller who was generous with the add-backs, and a debt-service coverage ratio that looked like 1.4x in the CIM turned out to be 0.9x in real life.

The data backs up what you're feeling. SBA 7(a) loans written in 2022 through 2024 are defaulting at about twice the pace of the pre-pandemic vintages. The portfolio-wide default rate hit 4.8% in March 2026, which is the highest it's been since 2013. That's a cohort of people, not a personal failing, and it's the cohort we started this firm to work with.

What happens when you stop paying

Understanding the sequence matters more than anything else in this guide, because your options get narrower at every step.

1. Delinquency, roughly days 1 to 60. The lender's servicing team calls. Counterintuitively, this is your best window rather than your worst. The lender has a lot of discretion here and almost always prefers a workout to a default.
2. Workout or default, days 60 to 120 or so. The lender either grants relief (a deferment, a modification) or declares default and moves toward liquidation. Once the loan is in liquidation status, the lender's job changes from collecting payments to recovering collateral.
3. Liquidation. The lender sells business assets, calls the personal guarantee, and goes after any pledged collateral. If they took a lien on your house, that's when it comes into play.
4. SBA guarantee purchase. The lender submits the loss to the SBA, which pays the lender its guaranteed share, typically 75%. The debt doesn't go away. It moves. The SBA sends you a demand letter with a 60-day window to respond, usually with an Offer in Compromise.
5. Treasury referral. If nothing's resolved, the SBA refers the balance to the U.S. Treasury. Treasury adds a collection fee, commonly around 28 to 30 percent of the balance, and it has powers no private creditor has: it can take federal tax refunds, offset Social Security, and garnish up to 15% of your wages administratively, with no court judgment. There's no practical statute of limitations on federal debt.

Option one: ask the lender for relief before you miss a payment

SBA lenders can, on their own authority, grant a deferment (pausing or reducing payments, usually for up to six months at a time), re-amortize the loan over a longer term to bring the payment down, or modify terms. They do this routinely. It isn't a favor. A lender's SBA guarantee doesn't pay out until they've documented a good-faith effort to work things out, and a liquidation is slow, expensive, and recovers pennies. They would rather keep you paying something.

What gets a lender to yes: current financials, a 13-week cash forecast that's realistic instead of hopeful, and a specific plan for what changes. What gets them to no: silence, surprises, and a plan that boils down to things picking up.

What this fixes is a temporary cash crunch. What it doesn't fix is a business that fundamentally can't earn its debt service. If the operation is broken, a deferment buys time, and time is only worth something if someone uses it to fix the operation.

Option two: bring in an operator and restructure around the fix

This is the option lenders don't advertise, mostly because they can't provide it themselves. A lender staring at a default has two choices: liquidate for a fraction of the balance, or find a way to keep the loan performing. If a credible operator steps in, takes control of the business, and proposes a restructuring (a longer term, an interest-only period, sometimes a partial write-down), most lenders take the performing loan over the liquidation. We've yet to meet one who wouldn't at least hear it out.

This is what we do. In an earn-in, we take operating control and run the turnaround, and our compensation is equity that vests as results come in, so you pay us nothing up front. In a hybrid, we take a majority stake at a distressed valuation, and the substance of the deal is the debt work: we sit down with your lender and restructure the loan around a business we're now running. You keep a minority stake and an earnout tied to the recovery.

The lender gets a performing loan and an operator with a track record. You get out of the daily fire drill and, in most structures, a path off the personal guarantee as the business recovers. It only works if the business is fixable, meaning customers are still calling and crews are still showing up, which is why we'll tell you within one conversation whether it's a fit.

Option three: sell the business with the debt

A buyer can pay off the SBA loan as part of an acquisition, or, with the lender's and the SBA's approval, assume it. In a healthy sale the price clears the debt with something left over for you. In a distressed sale the price often is the debt. The buyer takes on or restructures the loan, and you negotiate a release from the guarantee as part of the deal. That release is discretionary rather than automatic. SBA loans aren't freely assumable, and a change of ownership doesn't release the original guarantor unless the lender and SBA specifically approve a substitution with release. When it's granted, your proceeds are walking away whole. Compared to a Treasury referral, that's not nothing.

The catch is that a business losing money is hard to sell to a conventional buyer. Conventional buyers need their own SBA loan, and no lender will finance the purchase of a business that can't cover debt service. So the buyer for a distressed trades business is almost always an operator who can fix it, in a distressed buyout priced on the assets and the recovery rather than on a multiple of earnings that don't exist yet.

Option four: the Offer in Compromise, and what it isn't

An Offer in Compromise (OIC) lets a guarantor settle the SBA debt for less than the full balance. It's real. People get them. But the common understanding of it is wrong in a way that hurts owners.

• The loan generally has to be in liquidation status, and in practice the business has to be closed and its assets sold. An OIC isn't a tool for saving an operating business. It's a tool for settling what's left after one has ended.
• The SBA compares your offer to what it could collect from you personally over time: home equity, accounts, garnishable income. If you have assets, the offer has to reflect them.
• Lump-sum offers, paid within about 90 days, get approved far more readily than installment offers.
• You can't be in an active bankruptcy, and any hint of hidden assets ends the conversation.

So the OIC belongs at the end of the decision tree, not the beginning. If the business can be saved, save it, because every dollar of recovered value makes the guarantee smaller or unnecessary. If it can't, the OIC is how you settle the guarantee cleanly. Get an attorney who does SBA workouts specifically. It's a niche, and the paperwork is unforgiving.

Option five: bankruptcy, and why it's usually the last resort

Small businesses have a streamlined form of Chapter 11 called Subchapter V, which lets an operating business restructure its debts while it keeps running. It's faster and cheaper than a traditional Chapter 11, but it has a debt ceiling: $3,424,000 as of January 1, 2026. (There's a bill to restore the pandemic-era $7.5 million limit, but as of this writing it hasn't passed.) A lot of acquisition loans sit right around that line.

Two things owners tend to underestimate. Bankruptcy of the business does not erase a personal guarantee unless you file personally as well. And it costs real money and real management attention at the exact moment the business has the least of both. It's a legitimate tool when a business has a viable core and an impossible balance sheet, but it's a tool a bankruptcy attorney should evaluate. If that's what your situation needs, we'll tell you and point you to a good one. We aren't a bankruptcy firm.

How to decide: two questions

Strip away the fear and there are really only two questions.

Could the business earn its debt service if it were run well? Not as it runs today. As it could run with pricing fixed, crews busy, receivables collected, and the owner doing one job instead of three. If yes, the business is worth saving, and options one and two are your path. If no, if the revenue simply isn't there, you're in options three through five, and the goal shifts from saving the business to protecting yourself and your crew.

Is the debt bigger than the business? If the loan is worth more than the business even after it's fixed, equity isn't the first conversation. The lender is. Any credible plan starts there, and you want someone in that room who has had that conversation before.

If you don't know the answers, that's what the first call is for. We'll look at the numbers and the operation and tell you which quadrant you're in, whether or not we turn out to be the right fit.