I Am Just A Part Owner In The Business Will The Sba Require Me To Sign A Guarantee On The Loan[yoast-breadcrumb]
I Am Just A Part Owner In The Business Will The Sba Require Me To Sign A Guarantee On The Loan
The Small Business Administration (SBA) frequently requires personal guarantees from business owners applying for SBA-backed loans. However, the specifics depend on the loan amount and the individual’s ownership stake. This article will examine SBA loan guarantees in depth, including relevant laws, implications, defenses, and more.
SBA Loan Guarantee Requirements
The SBA guarantees loans made by approved lenders to small businesses that would otherwise struggle to obtain financing. According to SBA regulations, lenders must obtain “unlimited, unconditional personal guarantees from all owners of 20% or more of the small business” for SBA-backed loans over $25,000
For example, if you own 25% of a business applying for a $100,000 SBA loan, you would likely have to provide an unlimited personal guarantee. This means the lender can pursue your personal assets if the business defaults.The SBA considers spouses jointly owning 20% or more of a business to be co-owners for guarantee purposes
So if you and your spouse each own 10%, you would both need to guarantee the loan.While the 20% threshold is common, lenders have discretion in setting guarantee requirements. They may request limited guarantees from owners with less than 20% stakes, or unlimited guarantees from all owners regardless of ownership percentage
Implications of Personal Guarantees
Signing a personal guarantee on an SBA loan carries significant financial risks. If the business defaults, the lender can seize your personal assets to recover losses. This includes bank accounts, investments, real estate, and other valuables.Personal bankruptcy does not discharge responsibility for an SBA loan guarantee
Legal Defenses Against Guarantee Enforcement
If your business defaults, you have several legal defenses to reduce guarantee liability.
Lender Misconduct: Lenders must comply with SBA regulations during loan origination, servicing, and liquidation
You may contest the guarantee if the lender failed to follow requirements. For example, if the lender did not properly service the loan before default.
Improper Guarantee Language: Guarantee wording must adhere to SBA standards. You could try to void the guarantee if the language improperly expands your liability beyond SBA limits.
- SBA loan guarantees are common requirements, especially from owners with 20%+ stakes.
- Guarantees allow lenders to seize personal assets if the business defaults.
- Legal defenses like lender misconduct and improper language can contest guarantees.
- Settlements after default may release guarantors at a fraction of liability.
- Consult an attorney to understand guarantee implications before signing.
While personal guarantees are common SBA loan requirements, guarantors have defenses against blanket liability if their business defaults. Consult an attorney to fully understand the implications before signing a guarantee agreement. With proper precautions, guarantees can provide small business owners with access to financing that may be otherwise unavailable.