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Here’s what happens to your PPP loan if your small business fails

Becht Paul 2 Small Bio Banner - Here’s what happens to your PPP loan if your small business failsMillions of small businesses impacted by the coronavirus pandemic have received relief via Paycheck Protection Program and Economic Injury Disaster loans, but according to a survey, many of them still don’t expect to survive. In a recent article, MWE partner Paul Becht discusses what could happen to you and your loan(s) if your business goes under.




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Loan defaults

All PPP [Paycheck Protection Program] and EIDL [Economic Injury Disaster loans] loans up to $25,000 don’t require collateral or personal guarantees from the business or business owner.

So, in the event a borrower can’t repay the loan and defaults, the lender generally wouldn’t be able to seize business or personal assets.

However, the risk of a loan default isn’t to be taken lightly, experts said.

The creditor — in this case, the federal government — may report the business to the credit scoring companies, which could adversely affect the ability to borrow again and increase their interest rate on any future debt.

The federal government, unlike a typical creditor, also has the ability to seize federally held assets such as a company’s income tax refunds or any other amounts due from the federal government, said Paul Becht, CPA, partner at Margolin, Winer & Evens.

The picture is murkier for EIDL loans that exceed $25,000, which are collateralized.

Any assets that remain in the business — such as warehouse inventory, receivables and equipment like machinery or trucks — could be seized by the SBA to cover an entrepreneur’s outstanding debt.

In addition, disaster loans exceeding $200,000 require a personal guarantee. That means the lender can also go after the business owner’s personal assets — cars, bank accounts, investments and personal tax refunds, for example — to secure outstanding debt.

“That is a much scarier proposition,” Becht said of an EIDL loan’s personal guarantee.  Read More>>

Read: PPP Flexibility Act eases rules for borrowers coping with COVID-19