Small Business Administration (SBA) — Foreclosure Risk
Beware of the "Great" SBA loans. The following story really happened. The borrower received a business loan for $250, 000. At the time he had only $100, 000 equity in his house. But the SBA lender put a mortgage of $250, 000 on the house.
Several years later the business went bad. The borrower still owed about $200, 000 on the loan. The SBA paid the bank lender its 75% guarantee, so the bank was whole. But the SBA required the lender to foreclose on the house to recoup its guarantee. By this time the house had appreciated, so the equity was about equal to the balance of the loan. No way could the borrower refinance. He would have lost the house except that a relative helped him out.
In effect the SBA agreed to a mortgage that was equal to 200% of the value of the house at the time! This is much worse than sub prime mortgages that are so much in the news. With the statistic that 90% os small businesses fail within 10 years, these foreclosures must be very common. When you ask the SBA about this, they say they don't maintain these statistics because they have the bank that actually does the loan process the foreclosure.
At a minimum the SBA should limit any lien on the borrower's residence to 90% of the value of the home at the time the loan is made.
The moral of the tale is beware of SBA loans. There is a good probability you will end up losing your house!