Understanding SBA Loans and Subchapter V: A Guide to Restructuring for Small Businesses

Small businesses are the backbone of economies worldwide, creating jobs and fostering innovation. To support small businesses, the U.S. Small Business Administration (SBA) offers various loan programs to fund capital purchases, consolidate debt, or be a financial bridge following a disaster. Many smaller businesses that experience cash flow challenges, particularly due to being overleveraged, have SBA loans. This article explores the different types of SBA loans and how Subchapter V—the new streamlined form of Chapter 11 for small businesses—can be utilized to effectively restructure these loans.

1. Types of SBA Loans

The SBA facilitates access to capital for small businesses through several loan programs, each tailored to meet specific needs. The most common types of SBA loans include:

a. 7(a) Loan Program: This is the SBA's primary and most flexible loan program. It provides financial assistance for various purposes, such as working capital, purchasing inventory, equipment, or real estate, and even refinancing existing business debt.

b. CDC/504 Loan Program: This program offers long-term, fixed-rate financing for the acquisition of major fixed assets like land, buildings, machinery, and equipment. It is typically used for expansion or modernization purposes.

c. Microloan Program: The Microloan program provides small short-term loans of up to $50,000 to help small businesses and certain non-profit childcare centers start and expand their operations.

d. Disaster Loan Program: This program provides loans to assist businesses affected by natural disasters like hurricanes, earthquakes, or wildfires, or in the case. It offers low-interest, long-term loans to help them recover and rebuild. Following the Covid-19 pandemic, the SBA funded approximately 4 million EIDL loans totaling $390 billion.

2. Challenges Faced by Small Businesses

While SBA loans serve as lifelines for many small businesses, external factors like economic downturns, unforeseen market changes, or even personal emergencies can lead to financial distress. In such circumstances, small business owners may struggle to meet their loan obligations, jeopardizing their operations and long-term viability.

3. Subchapter V and Its Advantages

Subchapter V of Chapter 11 of the Bankruptcy Code was introduced as part of the Small Business Reorganization Act (SBRA) to streamline the restructuring process for small businesses with debts up to $7.5 million. It offers a more accessible, certain, and cost-effective route to restructure debts and continue operations. The key advantages of Subchapter V include:

a. Simplified Reorganization: Subchapter V streamlines the restructuring process by eliminating certain procedural complexities present in traditional Chapter 11 cases, making it more suitable for small businesses.

b. Retaining Ownership: Business owners can retain their ownership and control while formulating a repayment plan. This allows them to continue operating the business and benefit from its future success.

c. Faster Process: The Subchapter V process is designed to be quicker and less expensive compared to traditional Chapter 11, allowing businesses to get back to focusing solely on their business faster.

4. Utilizing Subchapter V to Restructure SBA Loans

Small businesses that have acquired SBA loans can utilize Subchapter V to restructure their debts and reorganize their finances. By filing under Subchapter V, businesses can create a feasible repayment plan that addresses their financial challenges while maintaining essential operations. This restructuring plan must be approved by the bankruptcy court. Once approved, the plan becomes the new contract between the company and all of its creditors.

Conclusion

SBA loans have been instrumental in supporting the growth and sustainability of small businesses across the United States. However, the uncertain nature of business environments can lead to financial difficulties. When faced with these challenges, small businesses can turn to Subchapter V of Chapter 11 to restructure their debts effectively. By doing so, they can secure a path to recovery and continue contributing to the vibrant landscape of the small business community.

---

About EmergeLaw, PLC

EmergeLaw is a boutique law firm that represents small and middle market businesses and their owners in debt workouts, Chapter 11 reorganizations, Subchapter V restructurings, and other proceedings to help them deleverage and reposition for future success. Applying decades of experience and a specialized toolkit, our Nashville insolvency attorneys help entrepreneurs, family businesses, private equity funded companies, and real estate investors maximize value in ways that many clients find unexpectedly efficient and effective.