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SBA Loan Default: Stop the Hemorrhaging, How to Monetize Inventory from Workout through Liquidation

-- Coleman Report: January 5,2016

Borrowers of SBA loans default from time to time. As a result, under the guidelines of SBA SOP 50 57, lenders have 60 days from the start of negotiation to execute an agreed upon workout strategy or enforce debt collection and liquidate the assets. If the borrower wants to resolve the delinquency, both the lender and the borrower should agree on corrective measures in the workout plan. If unsuccessful, the lender should execute a Liquidation Plan (SBA Form 1979) to help ensure the loan and the assets are liquidated in a prompt and cost-effective manner.

Upon default of an inventory-driven business, due to inventory’s value and mobility, it is prudent for the lender to visit the site as soon as possible to:

  • Perform an analysis of the business

  • Audit the borrower’s book value of the inventory

  • Develop a workout strategy


When analyzing and reviewing corrective measures to improve business performance, the actions must be feasible and management be competent in the implementation. Unless the cause of the downturn in business is accurately identified in the analysis, the likelihood of returning to a default status is high.

Promotional Sale

With inventory-driven businesses poor business performance often is the result of mismanagement of the inventory leading to high cost of goods and low turnover. In this condition the most effective measure that can be taken as a corrective action is to perform a storewide promotional sale. Effective results include:

  • Sell-off of surplus and unwanted merchandise

  • Correct Key Performance Indicator inefficiencies

  • Generating cash flow quickly

  • Providing tools to market and manage the ongoing operation

Liquidation Sale

After efforts to prevent the liquidation trigger have been exhausted, it is the responsibility of the lending institution to adhere to the applicable SOP’s during the liquidation and collection process in order to decrease the chance of denial or repair.

After management has been dissolved it is prudent for lenders to:

  • Order an appraisal

  • Identify the current status of the inventory, FF&E or other related assets

  • Accurately assess recovery value

Inventory often represents the largest percentage of unrealized gains during the liquidation process. To prevent capital from being left on the table, the orderly disposition of merchandise through sell-off to the public is the most effective way to mitigate losses and earn higher returns. It is not uncommon for:

  • Returns to exceed 90%-110% of the cost of inventory

  • Sales that will lead to higher returns than auction or bulk sell-off

  • Inventory to sell-off to the bare walls

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