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If you and a lender agree in writing to a personal guarantee, the lender will hold you legally accountable for your company’s debt in the event of default. If your company is unable to repay the loan, the lender may take your personal belongings in order to pay off the debt and recover its losses.
A personal guarantee is frequently needed by lenders because it lowers the risk they run when providing small businesses with financing. What you should know about SBA loans and personal guarantees is provided below.
Most SBA loans require a personal guarantee
Anyone who owns 20% or more of the business is typically required to provide an unlimited personal guarantee for SBA loans. S. Small Business Administration . SOP 50 10 5(F) Lender and Development Company Loan Programs. Accessed Jun 14, 2022. View all sources. Lenders may also require a limited or unlimited personal guarantee from other business owners, such as those who hold 15% of the company.
SBA lenders are also required to get unlimited guarantees from:
At least one owner must offer an unlimited personal guarantee if no single person or entity owns 20% or more of the company.
Are SBA disaster loans personally guaranteed?
Personal guarantees are required for the most popular SBA loan programs, including SBA 7(a) loans, 504/CDC loans, and microloans, but they might not be for SBA disaster loans. For instance, personal guarantees were only needed for COVID-19 Economic Injury Disaster Loans for loan amounts over $200,000Congressional Research Service. Small Business Administration: A Primer on Programs and Funding. Accessed Jun 14, 2022. View all sources.
For loans of $25,000 or less, other SBA disaster loans, such as Home and Personal Property Loans and Business Physical Disaster Loans, typically don’t require collateral. However, you might need to offer collateral or a personal guarantee for loans of $25,000 or higher.
Unlimited vs. limited personal guarantees
When applying for an SBA loan, you’ll typically have to provide an unlimited personal guarantee. Anyone who owns less than 20% of the company, however, may be asked to provide a limited personal guarantee by your lender.
Here are some details about how these two types of guarantees differ from one another.
Unlimited personal guarantee
If your company is unable to make payments, this agreement ensures that you will pay back the loan in full. Before asking the business owner for repayment, the lender is not required to look for payment from any other source first.
For this kind of personal guarantee, lenders may use SBA Form 148 or their own comparable form.
Limited personal guarantee
If your company is unable to pay the debt, a lender’s repayment request under a limited personal guarantee is limited to one of the following:
The Borrower shall pay all amounts due pursuant to the terms of the Guarantee upon the Lender’s written request. The lender is not required to seek payment from any other source before turning to the business owner for payment, similar to the unlimited guarantee.
For the limited personal guarantee, lenders may use SBA Form 148L or a similar form, and they must specify the guarantee option in the authorization.
Compare small-business loans
See and contrast SBA loan alternatives on NerdWallet’s ranking of the top small-business loans.
Our suggestions are based on the needs of business owners, the size of the lending market, the track record of lenders, and an examination of rates and other elements so you can make the best financing choice.
Randa Kriss, a small-business writer for NerdWallet, is the author. Read more.
FAQ
Are you personally liable for SBA loans?
A loan issued in collaboration with another bank and guaranteed by the Small Business Administration is known as an SBA loan. Despite the favorable terms of an SBA loan, you will be personally responsible for it. This means that the lender may pursue your personal assets if the business fails to repay the loan.
Does SBA enforce personal guarantee?
Whoever owns more than 20% of a business must typically provide an unlimited personal guarantee in order to obtain an SBA loan. Other business owners may also be required to provide limited or unlimited personal guarantees by lenders.
Who has to personally guarantee SBA loans?
Anyone who owns 20% or more of the business applying for the loan must provide a personal guarantee in order to qualify for an SBA loan. In the event that your business assets are insufficient to cover loan payments, you authorize the lender to take any of your personal assets by signing an SBA loan personal guarantee.
Are SBA loans direct or guaranteed?
The SBA guarantees up to 80% of private lenders’ loans that are made with its assistance, lowering their risk and enabling them to offer financing that would not otherwise be available at competitive rates.