What Is a Charge-Off on an SBA Loan?
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Key takeaways
An SBA loan charge-off is when the SBA removes an outstanding loan balance from its accounting records, after it has determined that the lender is unlikely or unable to receive any more payment from the borrower.
As the borrower, you are still liable for the amount that has been charged off, and collection efforts will continue through the Department of Treasury after the SBA charges off the balance.
Charge-offs can damage your personal credit, and remain on your credit report for seven years, even after they are paid.
If your SBA loan status shows “charged off,” it means that the SBA has determined the lender won’t be able to collect additional repayments from you. This typically happens after several months of missed payments.
As part of the charge-off, the SBA first purchases the loan balance from the lender, and then removes the outstanding balance from its accounting records. A charge-off is an administrative action not a form of loan forgiveness, meaning borrowers are still responsible for repaying debt that has been charged off.
In fiscal year 2024, almost $700 million SBA 7(a) and 504 loan dollars were charged off.
Here’s what you can expect if your SBA loan has been charged off.
When does an SBA loan charge-off occur?
The SBA can charge off your business loan when it’s in default, which typically happens after a two- to six-month period of delinquent, or missed, payments.
Before SBA lenders can submit a loan to be charged off, they must make good faith efforts to accommodate borrowers who are experiencing temporary hardships or cash flow problems. These efforts can include deferred payments, changed due dates, modified interest rates or payment amounts, extended loan terms and more.
The SBA’s guidelines for lenders say that a charge-off request is appropriate in the following circumstances:
After the lender has made reasonable efforts to recover the loan amount through voluntary payments, an Offer in Compromise (OIC) submitted by the borrower, liquidating collateral or enforcing collections.
If the anticipated cost of further collection efforts is more than the balance owed.
If the borrower can’t be located or is unable to pay.
When a lender can no longer collect on the balance due to factors like personal bankruptcy, the expiration of a statute of limitations or other defenses that are valid under federal law.
For guaranteed loans, the SBA purchases the loan from the lender before charging the balance off.
» MORE: Do SBA loans require collateral?
What happens when your SBA loan is charged off?
There are a few things you can expect after your loan has been charged off by the SBA.
Your personal credit will be impacted
An SBA charge-off can negatively impact your personal credit score as a result of the charge-off itself and the period of delinquency that leads to your loan being charged off, both of which are reported to credit bureaus.
Charge-offs can appear on your credit report for up to seven years — starting from the first missed payment that ultimately led to the loan being charged off — which may prevent you from securing future loans (for both business and personal uses).
You are still responsible for the unpaid balance
A charge-off does not mean your debt has been forgiven or canceled — it’s an accounting action, in which the SBA removes the loan balance from its accounting records. You are still responsible for paying the amount that has been charged off.
You may be contacted by a private collections agency
When your SBA loan has been charged off, the SBA will refer your file to the Department of Treasury, which may use a private collection agency to try and recoup some of the charged-off balance.
How can you prevent an SBA loan charge-off from happening?
It takes several months of missed payments and a lack of communication for the SBA to determine that your lender won’t receive any more money from you. There are several ways you can prevent an SBA charge-off.
Pay attention to lender communications. Your SBA lender should notify you via letters or emails if your account is delinquent or in default. Regularly check communication from your lender to ensure you aren’t unknowingly in default for accidental missed payments or other violations, and indicate to your lender that you are willing to work with it regarding any delinquent periods.
Stay on top of your business finances. Monitor your business finances throughout the life of your loan to stay on top of changes in cash flow, or unnecessary expenses that may interfere with your ability to make payments on your SBA loan.
Be upfront with your lender. If you are going to pay late, miss a payment or underpay, you should let your lender know as soon as possible. Although you may incur fees, upfront communication and honesty can reassure your lender that you intend to pay, and your lender may offer solutions such as deferred payments, modified payment amounts or interest rates or extended loan terms.
» MORE: SBA loan requirements
What can you do after your SBA loan has been charged off?
After your SBA loan has been charged off, you may be able to work with the Department of Treasury or collection agency to negotiate a payment plan or a settlement agreement that’s smaller than the owed amount.
You should make every effort to pay down the charged-off balance. Even though any charge-off will impact your credit score, future lenders may be more lenient about past charge-offs that have been settled.
After seven years have passed, check to make sure the charge-off no longer shows on your credit report. Regardless of whether it's been paid, you can request to have it removed if it hasn’t fallen off after that timeframe.
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