For SBA lenders
Short answer
The SBA expects a lender to implement a 'workout plan' for a defaulted loan that prudently addresses the default, explores alternatives to liquidation, and aims to maximize recovery for the SBA and the lender.
Before initiating formal liquidation, lenders are expected to make reasonable attempts to rehabilitate a defaulted 7(a) loan. A workout plan might include a deferment, restructuring of payments, negotiation with the borrower, or additional collateral, if feasible. The plan must demonstrate prudent servicing, be documented in the loan file, and outline the steps taken to prevent further deterioration and minimize potential losses.
A 7(a) loan defaults due to temporary cash flow issues. The lender implements a workout plan involving a 3-month deferment, a payment modification, and increased financial reporting requirements, aiming to bring the borrower back to performing status before considering liquidation.
Insider move
Lenders must demonstrate proactive and prudent efforts to work out defaulted loans. Failure to implement a reasonable workout plan before moving to liquidation can lead to a guaranty repair or denial, as it may indicate a lack of diligent servicing.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 57 - 7(a) Loan Servicing and Liquidation
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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