Once a Small Business Administration (“SBA”) 7(a) loan is in default, lenders should conduct a thorough inspection of the borrower’s business premise. The reason is twofold.

First, it provides lenders with the opportunity to identify the status of the available collateral. An accurate assessment of the Recoverable Value of the collateral at an early stage of liquidation and collection is an invaluable tool that can significantly influence the recovery process, allowing the lender to quickly eliminate or solidify potential liquidation and collection options.

Second, lenders can assess whether out-of-court liquidation and collection avenues, such as workouts or repossession, are feasible. The process of resolving a defaulted SBA 7(a) loan through a workout generally avoids the liquidation of collateral by the lender. Post-default site visits may provide insight on whether an obligor can revitalize the business and possibly resolve the problems that caused the default.

A post-default site visit is mandatory unless specifically exempted. Generally, post-default site visits are required within sixty (60) calendar days of an uncured payment default. For non-payment defaults (such as bankruptcy filing, business shutdown, or foreclosure by a prior lienholder), the site visit must occur within fifteen (15) calendar days of the occurrence of the adverse event. Site visits should occur earlier if there is concern that the collateral could be removed, lost, or dissipated.

Certain loans are exempt from a post-default site visit. If the loan is unsecured, a site visit is not required. In addition, depending on the Recoverable Value of the collateral, a site visit may be unnecessary. If the aggregate Recoverable Value of the personal property collateral is less than $5,000 or the Recoverable Value of each parcel of real property collateral is less than $10,000, a site visit is not required. That said, generally, the site visit is an opportunity to obtain a valuation of the collateral in order to calculate the Recoverable Value.

Even if a site visit is not conducted, a lender still must prepare a post-default Site Visit Report, explaining why the site visit was not necessary or detailing the lender’s findings from the inspection, including an inventory of the remaining collateral and an assessment of its condition and value. The Site Visit Report should include, when applicable, the lender’s assessment whether a workout is feasible, an itemization of the collateral, the Recoverable Value of the collateral, whether the obligor is behind on rent if the premises is leased, whether a liquidation sale could be held on the leased premises, whether any real property is occupied by someone other than an obligor, a liquidation strategy, assessment of any environmental risk with respect to liquidation, and proposed care and preservation of the collateral pending liquidation. A Site Visit Report should be kept in the loan file and prepared after every visit to the borrower’s business premise, regardless of whether the loan is in regular servicing or liquidation status.

By recognizing and implementing these careful and considered initial steps, lenders who liquidate and collect defaulted SBA 7(a) loans can significantly reduce the risk of a repair or a denial from the SBA in the event of a loss. For a full outline of SBA’s policies and procedures concerning post-default site visits, lenders are encouraged to review Chapter 15 in the SBA Standard Operating Procedure (“SOP”) 50 57 2.