Understanding SBA loan personal guarantees

For small business owners seeking financial assistance, the Small Business Administration (SBA) offers various loan programs, including the popular SBA 7(a) loan. While these loans can provide valuable funding, they often come with the requirement of a personal guarantee. In this article, we will delve into the concept of SBA personal loan guarantees, explaining what they entail, their significance, and how they can impact small business owners.

What is an SBA Personal Loan Guarantee?

A personal loan guarantee for an SBA loan is a legally binding agreement where the borrower assumes personal responsibility for repaying the loan. If the borrower defaults on the loan, the lender can pursue the borrower’s personal assets to recover the outstanding balance.

Full guarantee from 20% owners

Individuals or entities who own 20% or more of a business applying for an SBA loan must provide an unlimited full guaranty by signing SBA Form 148. Although rare, the SBA or SBA lender may require a person with little or no ownership to provide a personal guarantee if the person is deemed critical to the operation of the business. The SBA lender will require personal financial statements (see Form 413) to be provide in order to assess the financial strength of the personal guarantee(s).

Each loan must be guaranteed by at least one individual or entity. If no one individual or entity owns 20% or more of the Applicant, at least one of the owners must provide a full unconditional guaranty.

Limited Guarantee

When ownership interest of an Applicant is held by a corporation, partnership or other form of legal entity, the ownership interests of all individuals must be disclosed. If a limited guaranty is used, the SBA Lender must choose one of the payment limitation options in SBA Form 148L (Unconditional Limited Guaranty) or, for 7(a) loans, equivalent Lender’s form and specify the option in the E-Tran terms and conditions.

Spousal guarantee

Each spouse owning less than 20% of an Applicant must personally guarantee the loan in full when the combined ownership interest of both spouses and minor children is 20% or more.

For a non-owner spouse, the SBA requires the signature of the spouse on the appropriate collateral documents. The spouse’s guaranty secured by jointly held collateral will be limited to the spouse’s interest in the collateral.

Other guarantees

An SBA Lender may require a guarantee out of an abundance of caution from a person or entity not otherwise required by provide a guarantee, called a supplemental guarantor.  This is not common.

Six-month look back test

Any person or entity subject to the guaranty requirements 6 months prior to the date of the loan application would continue to be subject to the requirements even if their ownership interest to less than 20%.  The only exception to the 6-month rule is when that Person completely divests their interest prior to the date of application. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the business and any associated affiliated passive company in any capacity, including being an employee (paid or unpaid).

Conclusion

SBA personal loan guarantees are a critical aspect of securing financing for small businesses. While they provide lenders with added security, borrowers must understand the potential consequences and carefully. Given the potential impact of personal loan guarantees, small business owners are advised to seek professional guidance from attorneys, accountants, or financial advisors. These experts can provide insights into the implications of personal guarantees, assist in negotiating terms, and ensure compliance with legal and financial obligations.

 

FAQs related to personal guarantees for SBA loans

What is a personal guarantee for an SBA 7(a) loan?

A personal guarantee for an SBA 7(a) loan is a legally binding agreement that holds the borrower personally responsible for repaying the loan in the event of default. It means that the borrower’s personal assets, such as homes, cars, or other possessions, can be used to satisfy the loan obligation.

Are personal guarantees required for all SBA 7(a) loans?

Yes, personal guarantees are generally required for SBA 7(a) loans. The SBA wants to ensure that there is an additional layer of assurance for lenders, especially for small businesses that may have limited assets or credit history. However, specific eligibility requirements may vary depending on the lender and the loan amount.

 

Can a personal guarantee be limited in scope or amount?

Yes, it is possible to negotiate the scope or amount of a personal guarantee for an SBA 7(a) loan. Some lenders may consider reducing the personal guarantee requirement based on factors such as the borrower’s creditworthiness, collateral, or business performance. SBA Form 148L lists the most common cases for guarantee reduction

 

What happens if a borrower defaults on an SBA 7(a) loan with a personal guarantee?

If a borrower defaults on an SBA 7(a) loan and has provided a personal guarantee, the lender can pursue collection efforts against the borrower’s personal assets. This can include seizing bank accounts, placing liens on property, or taking legal action to recover the outstanding loan balance. It is crucial to understand the potential consequences of default before signing a personal guarantee,

 

Can personal guarantees be released or removed from an SBA 7(a) loan?

Personal guarantees for SBA 7(a) loans are typically difficult to release or remove. However, in some cases, lenders may consider releasing a personal guarantee if the borrower demonstrates improved financial stability, strong business performance, or provides additional collateral. SBA Form 148L lists the most common cases for guarantee reduction. We advise discussing options with your SBA lender.

 

Can a spouse’s assets be included in a personal guarantee for an SBA 7(a) loan?

In certain circumstances, a lender may require a spouse’s assets to be included in a personal guarantee for an SBA 7(a) loan. This commonly occurs if the spouse has a significant ownership stake in the business or if the loan is being used for joint purposes.

It is important to carefully review the loan documents and seek legal advice to understand the extent of liability for both spouses.

 

Can personal guarantees be assigned or transferred to another individual or entity?

Personal guarantees for SBA 7(a) loans are typically non-transferable. They are specific to the individual borrower who provided the guarantee.

 

Can I have someone who is not an owner by an SBA loan guarantor?

Yes, but the SBA lender per SBA lending rules will require that all 20% or greater owner(s) personally guarantee the SBA loan as well.