Are SBA Loans Personally Guaranteed?
SBA loans require a personal guarantee from anyone who owns 20% or more of the business applying for the loan. When you sign an SBA loan personal guarantee, you authorize the lender to seize any of your personal assets to repay the loan, if your business assets aren’t sufficient to cover loan payments.
SBA loans—issued by SBA lending partners (typically banks) and partially guaranteed by the U.S. Small Business Administration (SBA)—are often considered the most desirable financial products on the market for small businesses. Due to the guidelines and guarantee the SBA provides for these business loans, lenders are able to offer low-interest rates, long terms, and high loan amounts to small businesses that might not qualify for other types of financing.
All of this being said, if you’re currently applying for or looking into SBA loans, you might be wondering: Do SBA loans require a personal guarantee?
In short, the answer is yes—standard SBA loans do require a personal guarantee, although individual lenders have some discretion to determine exactly who from the business has to sign a personal guarantee and what type of guarantee they have to sign.
With this overview in mind, let’s break down the details regarding how personal guarantees work and how they apply to SBA loans.
What Is a Personal Guarantee?
First, let’s review the basics: What is a personal guarantee and how does it work?
In short, a personal guarantee is an agreement you sign that authorizes a lender to use your personal assets to pay back a loan (or any other type of debt) in the event your business can’t pay back the loan itself. In this case, personal assets might include your house, car, savings, retirement fund, etc.
Therefore, if you are unable to make your business loan payments and you default on the loan, the lender will be able to claim your personal assets to cover their losses for the capital you’re unable to pay back—making a personal guarantee an important financial security measure for lenders.
If you think of this agreement in personal finance terms, you might say a personal guarantee is the equivalent of you, as the business owner, becoming a co-signer on your business loan.
This being said, there are different types of personal guarantees and the type you’re asked to sign (or whether you’re asked to sign one at all) largely depends on the individual lender and their policy. As an example, most business credit cards, in fact, include a personal guarantee clause in their applications that states you, the individual, are responsible for the debt if your business cannot pay it.
With this in mind, it’s important to note that personal guarantees can be applicable and legally binding for all types of businesses. If you’re a sole proprietor, you, the individual are responsible for signing the personal guarantee. If your business is a partnership, LLC, or corporation, on the other hand, a lender will typically ask all partners, owners, or stakeholders with a certain percentage of investment in the business to sign a personal guarantee.
Do SBA Loans Require a Personal Guarantee?
Although, on the whole, personal guarantees are not inherently complex, they can be more confusing as they relate to SBA loans.
As we mentioned above, most SBA loans are actually issued by lending partners, like banks, and not from the SBA itself. This being said, however, the SBA itself does offer a guarantee on these loans—meaning if your small business is unable to pay back your loan, the SBA guarantees a portion of the total amount to the lender and agrees to pay it back on your behalf.
In this way, the SBA guarantee means less risk for lenders, as they know that if a business is unable to pay back the loan, the SBA will pay back a portion of their losses. Therefore, because the SBA guarantee means less risk for lenders, they’re more likely to lend to small businesses they wouldn’t have worked with otherwise.
With all of this in mind, even though the SBA provides a guarantee on these loans, they still require that their lending partners obtain personal guarantees from at least one business owner that’s applied for an SBA loan from one of the standard programs. According to the SBA guidelines,
“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.”
Therefore, although the SBA requires only one personal guarantee, 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 company’s operations might be asked by a lender 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%.
Unlimited vs. Limited SBA Loan Personal Guarantees
So, as we’ve just explained, although all standard SBA loans require a personal guarantee, the specific type of guarantee you’re asked to sign may depend on your lender and your stake in the business. In this way, if you only own 10% of a business that’s applying for an SBA loan, you might not be responsible for signing a personal guarantee at all.
However, it’s extremely important to understand what the different types of SBA loan personal guarantees are, in case you are asked to sign one for your loan. After all, signing an SBA loan personal guarantee without understanding the terms could put your financial future at risk.
Overall, you’ll be asked to sign one of two different types of personal guarantees:
Unlimited Personal Guarantee
As mentioned above, business owners who own 20% or more of the business will need to sign this type of personal guarantee. With an unlimited personal guarantee (also called an unconditional guarantee), you are agreeing to let the lender recover 100% of the outstanding loan balance.
When providing an unlimited 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
As long as one business owner has signed an unconditional personal guarantee, the lender has met the SBA’s requirements for personal guarantees. However, as we mentioned, the lender may ask other business owners to sign unlimited or limited personal guarantees.
The difference between these two types, as their names imply, is that limited personal guarantees set a dollar limit or agreed upon collateral value on what can be collected from your personal assets in the event that your business defaults on its SBA loan.
This, of course, offers more protection for your personal assets. Again, business owners who own 20% or less of the business might be asked to provide a limited guarantee. Limited personal guarantees require SBA Form 148L.
With all of this in mind, it’s also important to explain that if you’re asked to sign a limited SBA loan personal guarantee, you’ll also have to indicate your payment limitation, in other words, how you’re responsible for repaying the loan in the case of default. These options (as seen in the image below) are as follows:
- Balance reduction: In this case, you personally guarantee the SBA loan until the balance reaches a certain amount. For example, if you sign a limited personal guarantee on a $100,000 SBA loan, you might be released from liability when the total balance of the loan (principal plus interest) reaches $20,000.
- Principal reduction: This is option is essentially the same as balance reduction, except your principal balance is what matters. Here, interest isn’t included when determining your liability for repayment.
- Time-bound liability: With this payment limitation, you personally guarantee the loan for a specific number of years, after which you are released from responsibility.
- Maximum liability: In this case, you know from the beginning the maximum amount you might owe if your 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 you’re liable will be a fixed percentage of the loan—usually proportionate to your stake in the company.
- Collateral: In this case, your liability is limited to the amount of a specific type of collateral that you’ve pledged to the lender. As an example, you might offer up a piece of property as collateral worth $50,000—here, you would be liable for that amount, $50,000.
- Community property or spousal interest: If you’re the spouse of a business owner applying for an SBA loan, you may be asked to sign a personal guarantee as well—especially if you have an ownership claim to the business owner’s personal assets that are being used to guarantee the loan. Therefore, the last option on the payment limitation section of SBA Form 148L is reserved for these cases, indicating the guarantee is limited based on your claim to the collateral the business owner has offered up to secure the loan.
As you can see, although, once again, at least one SBA loan personal guarantee is required in all cases, lenders do have some discretion to ask for guarantees from additional owners or stakeholders in the business. In this way, if your business loan application is strong, you might be able to negotiate more favorable personal guarantee terms with your lender.
The Bottom Line
Ultimately, if you’re asking, “are SBA loans personally guaranteed,” the answer is yes. Although not all business owners or stakeholders will necessarily be required to sign an SBA loan personal guarantee, every standard SBA loan must be secured by at least one individual.
In this case, if you’re looking for an SBA loan with no personal guarantee, or any business loan with no personal guarantee, you’ll be unlikely to find one. Even though there are some types of unsecured business loans on the market, most types of financing will require security of some sort, even if not in the form of a personal guarantee.
Although it may seem unnecessary, a personal guarantee (in addition to the SBA guarantee) mitigates risk for the lender. After all, the SBA only guarantees a portion of each loan and that amount varies with each loan and lender, and also depends on the applicant’s qualifications. Therefore, with an SBA loan personal guarantee, the SBA and the actual lender can ensure that you and your business are first and foremost held responsible for paying back the loan, even in the case of default.
This being said then, the best thing you can do is ensure that your SBA loan application is as strong as possible and if you’re able to, work with your business lender to negotiate an agreement that limits your personal risk. Plus, before you agree to anything, you’ll want to 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.
- SBA.gov. “SOP 50 10 5(F)“