Do SBA Loans Require a Personal Guarantee?

Are SBA Loans Personally Guaranteed?

SBA loans require a personal guarantee from anyone who owns 20% or more of a business. When you sign a personal guarantee, you authorize the lender to seize any of your personal assets to repay the loan, if business assets aren’t sufficient to cover loan payments.

Small Business Administration loans, or SBA loans, are some of the most best loan products out there for small business owners. SBA loans offer low interest rates, long loan terms, and manageable monthly payments. Although the application process can be long and complicated, the affordability of SBA loans makes them worth the hassle.

As you prep for the process of applying for an SBA loan—of which there can be many steps—you might also be wondering if SBA loans require a personal guarantee. The answer is a bit more complicated than a simple yes or no. Here, we’ll cover how SBA loan personal guarantees work and the different types of personal guarantees you might come across during your SBA loan search.

How Do SBA Loans Work?

To better understand an SBA loan personal guarantee, it’s important to understand how SBA loan programs work in the first place. The U.S. Small Business Administration is an independent agency of the federal government that advocates for small businesses throughout the country. One way that the SBA helps small business owners is by facilitating access to capital. 

As you might already know, the Small Business Administration does not administer loans themselves. In order to procure an SBA-guaranteed loan, you’ll have to apply through a bank or other direct lender. The SBA guarantees a portion of the small business’s loan on behalf of the borrower.

This means that if a small business with an SBA-guaranteed loan can’t pay back their loan, the SBA will pay back the lender for a set portion of that loan. This makes lending to small businesses much less risky for the lender since they know that the government will pay them back, even if the borrower can’t.

Even though the loan is government-guaranteed, SBA loans aren’t available for just anyone. You need to have good credit and strong business financials to apply, and in most cases, you have to sign a personal guarantee.

Are SBA Loans Personally Guaranteed?

SBA loans are subject to the approval processes of both the bank you work with and the SBA guidelines. The SBA’s latest rules requires personal guarantees on all loans. In addition, most lenders require personal guarantees from business owners who borrow money.

Here’s the SBA’s language on personal guarantees:

“Each loan must be guaranteed by at least one individual or entity. If no one individual or entity owns 20% or more of the business, at least one of the owners must provide a full unconditional guaranty. Individuals who own 20% or more of the business must provide an unlimited full guaranty.”

SBA lenders are free to require unlimited or limited personal guarantees from individuals who own less than 20% of the business. For instance, a business partner who only owns 10% of the business but is critical to the operation of the company might be asked to provide a personal guarantee. Similarly, if the lender has doubts about the primary business owner’s creditworthiness, they can ask for personal guarantees from other owners. In addition, a spouse who owns less than 20% of the business must still provide a personal guarantee if the combined ownership interest of both spouses is 20%.

How Do Personal Guarantees Work?

A personal guarantee is simply an agreement a business owner signs agreeing to use their personal assets to pay back the loan in the event the business can’t pay back the loan itself.  It’s sort of like the business owner becoming a personal “co-signer” of the loan.

This agreement is binding even if the business is incorporated or a limited liability company (LLC). Let’s say your business defaults and cannot pay the SBA loan back. Then, the lender will enforce the personal guarantee to repay the loan, plus any legal fees accrued by the lender in pursuit of the guarantee.

Depending on the personal agreement you sign, the lender can then go after your house, your car, your life savings, retirement, your kid’s college fund, and any other assets they can find to cover the cost of the loan and legal fees. There are different kinds of personal guarantees, and the level of exposure to your personal assets differs with each.

Different Types of SBA Loan Personal Guarantees

Depending on your lender and your stake in the business, there are different types of SBA personal guarantees that you might be asked to sign. It’s extremely important to understand what type of personal guarantee you are signing into.Signing an SBA loan personal guarantee without understanding the terms could put your financial future at risk.

No one applies for a business loan thinking that they might not be able to pay it back. However, the reality is that a significant percentage of small businesses fail. You can never predict what might happen. If you’re unable to pay back a loan with business revenue, a personal guarantee puts your personal assets at stake.

Before you sign that dotted line, let’s take a look at the two most common types of SBA loan personal guarantees:

• Unlimited Personal Guarantee – Business owners who own 20% or more of the business will sign an unlimited personal guarantee, you are agreeing to let the lender recover 100% of the outstanding loan balance. When providing an unlimited full personal guarantee, you’ll be asked to complete and sign SBA Form 148 along with the rest of your SBA loan application. These guarantees are called “unlimited” for a reason. They essentially offer you zero financial protection if your business isn’t as successful as planned.
• Limited Personal Guarantee – Limited personal guarantees set a dollar limit or agreed collateral value on what can be collected from your personal assets in the event that your business defaults on its loan. This offers more protection for your personal assets. Business owners who own 20% or less of the business might be able to provide a limited guaranty. Limited personal guarantees require SBA Form 148L.

If you provide a limited personal guarantee, your responsibility for repaying the loan can be limited in one of several ways:

• Balance Reduction – In this case, the business owner personally guarantees the SBA loan until the balances reaches a certain amount. For example, the business owner who signs a personal guarantee on a $100,000 SBA loan might be released from liability when the total balance of the loan (principal plus interest) reaches $20,000.
• Principal Reduction – This is the same as balance reduction, except principal balance is what matters. Interest isn’t included when determining the business owner’s liability for repayment.
• Time-Bound Liability – In this case, the business owner personally guarantees the loan for a specific number of years, after which they are released from responsibility.
• Maximum Liability – In this case, the business owner knows from the beginning the maximum amount they might owe if the business defaults. For instance, liability on a $100,000 loan might be limited to $30,000 for a particular business owner.
• Percentage Liability – The amount for which the business is liable will be a fixed percentage of the loan—usually proportionate to the person’s stake in the company.

As you can see, the specifics of a personal guarantee really matter to your bottom line and to the fall out if your business is unable to pay. If your loan application is strong, you might be able to negotiate more favorable personal guarantee terms with your lender.

Why Do Lenders Require an SBA Loan Personal Guarantee?

It may seem like overkill—isn’t a guarantee from the government enough to satisfy the lender? While an SBA guarantee does decrease the risk for the lender, the SBA only guarantees a portion of the loan.

Under the SBA 7(a) loan programs, the SBA typically guarantees from 50% to 85% of an eligible bank loan. The percentage of the loan the SBA guarantees varies with each loan and lender, and also depends on the applicant’s qualifications.

With that in mind, the lender will likely—if not, definitely—want to have the remainder of the SBA loan guaranteed by the business and, failing that, the personal assets of the business owner.

Ideally, the bank wants business owners to have a financial stake in the success of the business, and they want business owners to understand that they can’t just walk away from the debt if the business fails—leaving the bank hanging. The government also wants to ensure that the lender has collected as much of the loan as possible from the business owner, before relying on the taxpayer-subsidized government guarantee.

SBA Loan Personal Guarantee: Frequently Asked Questions

What if a business has more than one business owner?

According to SBA standards, anyone with a 20% or greater stake in the business should be part of the guaranteeing process.

This will help define each stakeholder’s personal debt responsibility should the company default on a business loan.

How much will a stakeholder be required to pledge?

Again, it depends on the loan amount, how much the of the loan is already guaranteed by the SBA, and how many stakeholders are involved in the loan application process. Business owners who own 20% or more of the business must provide an unlimited guarantee of the full loan amount. Business owners with a smaller ownership interest might provide a limited or unlimited guarantee, depending on the lender’s policies.

What if a stakeholder has no personal assets to pledge?

If you or a major stakeholder in your business don’t have the personal assets to pledge toward a loan guarantee, it may be difficult but not impossible to secure the loan. According to the SBA, “if adequate collateral simply is not available, this fact alone will not cause SBA to decline an otherwise qualified loan.”

Does my business status protect me from personal guarantee requirements?

This is exactly why it’s important to fully understand what you’re signing. In most cases, a corporation or limited liability company protects individuals from business failings—including a business’s bad credit score or even a business bankruptcy. However, if you sign a personal guarantee agreement with your lender, this removes limited liability protection.

You will be responsible for fulfilling personal guarantee agreements should the bank activate them in the event your business fails—if you have signed a personal guarantee as part of your business loan.

SBA Loan Personal Guarantee: The Bottom Line

To answer the original question: Yes, you might be required to sign an SBA loan personal guarantee. Giving a personal guarantee is just a part of the process for many small business owners. But, it’s important to understand the risk that may be incurred as a result.

Work with your lender to negotiate an agreement that limits or even eliminates your personal risk. Before you agree to anything, make sure you fully understand the terms of your guarantee and what you can do to protect yourself by consulting with an attorney or business lending specialist.

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