Explaining Personal Guarantees on SBA Loans
November 7, 2018
November 7, 2018
Updated October 5, 2020
No small business can last very long without funding, and while some small businesses have the luxury of excess startup capital, wealthy donors or investors, or entrepreneurs who already have cash in hand from other ventures, many small businesses start with a dream and an SBA loan.
The lending process for SBA loans can be quite tedious and confusing if you donâ€™t know what to look for. Anytime you borrow money, youâ€™re putting your business at risk should you default on the loan or otherwise discontinue your loan payments. Itâ€™s important to get an honest financial picture of your business before you seek any funding.
In this guide, weâ€™ll look at how personal guarantees work on SBA loans, what they mean, and why you might need one.
The Small Business Administration provides funds for private businesses via government funding. The administrationâ€™s purpose is to help new businesses grow and thrive, and to assist businesses that may be struggling, looking to expand, or that need a new line of financing.
The SBA isnâ€™t exactly a lender, though it does help businesses secure funding. The SBA actually helps take on some of the responsibility of business loans, acting as a guarantor for anywhere between 50 and 85% of the loan should the business default. Having the SBA as this sort of â€śmiddle-manâ€ť makes it more likely that youâ€™ll find better loan terms, and provides some protection for the lender(s).
Donâ€™t make the mistake of thinking that just because itâ€™s a government-backed program, that anyone can qualify. Youâ€™ll still need to prove your creditworthiness, among other things, in order to qualify for financing through the SBA.
Before we look at what a personal guarantee means for an SBA loan, we need to look closer at what â€śpersonal guaranteeâ€ť actually means. A personal guarantee is a legal contract between you and your lender that essentially states that if the business defaults on the loan or otherwise fails to pay it back, any and all items of value, including property, vehicles, and inventory, will be seized by the lender and offered up as collateral to recover the cost of the loan.
This can also mean your personal assets are put at risk should the business fail to pay back the loan. Often, with small business lending, the lender will require some form of collateral anyway, and a personal guarantee is almost always part of the process.
This ensures that youâ€™ll have a good incentive to grow your business (after all, your personal assets could be at risk), but also that you wonâ€™t walk away from defaulting on a loan without any responsibility. Think of it as a safety net for the lender and motivation for you and your business.
The answer to this question comes down to the type of loan youâ€™re seeking. The lender also has a say in whether or not a personal guarantee is required. Some lenders wonâ€™t even consider lending to small businesses without a guarantee of some sort, while others are far more lenient.
The SBA has its own guidelines for lending, as youâ€™ve learned, but individual banks and financial institutions also have theirs. Youâ€™ll need to fit both criteria to even be considered, and even then, you may still need collateral in order to secure your funds.
Business owners often ask the question of how much for a personal guarantee, but the truth is, the amount varies greatly depending on the amount youâ€™re borrowing, the lender, how many stakeholders are signing the guarantee, and what you have to offer as a guarantee for the loan.
There are also several different kinds of loan agreements to consider. Each of these has their own terms, which can change the required amount of collateral or stakeholders.
Thousands of businesses secure funding for their operations annually via the SBA, to great success. As long as youâ€™re careful with the terms of your loan, who you borrow from, and your choice of business partner(s), SBA funding can help launch your business to new heights. Just be sure youâ€™re certain that extra funding is what your business actually needs and that youâ€™ll be able to recover the cost of the loan. The last thing you want on your business or personal credit report if a defaulted loan!
SBA loans may require a personal guarantee, but luckily, there are several kinds of loans to consider and different personal guarantee terms. Make sure you include your business partners in the liability of the loan; you donâ€™t want to be stuck paying it back yourself if the business fails. If you donâ€™t understand your loanâ€™s terms or any part of the process, itâ€™s a good idea to hire an attorney or an accountant to help you better understand the loan, the lending process, and your business finances.
You can also contact the SBA via their website or phone number for more information on SBA loans and lending terms. Remember that any collateral you put up could potentially end up being seized to recover the cost of the loan, so borrow wisely and always read the fine print.