What You Need to Know About Personal Guarantees on Business Loans
Is a personal guarantee a must for SBA loans? What if you don't have assets to pledge? Here's everything you need to know about personal guarantees on business loans and why one might be necessary if you're hoping to get an SBA guaranteed loan.
How much do you know about personal guarantees on business loans?
There are many questions that may come up when you're working to get a business or SBA loan. If you don't have the assets you need, a personal guarantee might become necessary. But is it a good idea?
In this detailed guide, we'll go over everything you need to know about personal guarantees on business loans and the SBA. Keep reading to learn more!
What Are SBA Loans?
SBA or Small Business Administration loans are a bit more complicated than regular small business loans. However, if you qualify, they are a great source of funding for business owners.
SBA loans require more paperwork than traditional loans do. But they come with lower interest rates, as well as longer loan terms, making these well worth the extra work.
When you're getting everything prepared to apply for an SBA loan, you might come across SBA loan guarantee information. Are personal guarantees on business loans required by the SBA? And if they are, how does that personal guarantee work?
The answer isn't exactly straightforward. Let's get into everything you'll need to know to answer those questions.
How Do SBA Loans Work?
Before you can understand SBA personal guarantees, you'll need to know how the loans themselves work.
The SBA doesn't actually give out loans. It's a government program that guarantees a part of the business loan on the borrower's behalf. If you get an SBA loan and end up not being able to pay it all back, the SBA will pay for the portion that it has "guaranteed."
This means these loans are less risky as a lender. Even if you can't pay it all back, the you may be able to submit an SBA offer in compromise. To get these loans, you generally have to apply through a bank or another SBA-approved lender.
Are Personal Guarantees on Business Loans Required by SBA?
This usually depends on the lender you're getting the loan from, and how qualified your business is for the loan.
SBA loans need to be approved by the bank you're working with as a lender, and also by the SBA itself. Your lender might require a personal guarantee on business loan. Even though the SBA doesn't require it, you'll still need it if your lender does.
What is an SBA Loan Personal Guarantee?
As this point, you might be wondering: what is a personal guarantee on business loan, anyway?
A personal loan guarantee means the business owner has signed an agreement to use their personal assets to pay off the loan, if the business can't afford to pay it back. In short, you become a sort of co-signer on your own loan.
For example, your business might fail after you've taken out the loan, leaving you unable to pay your bills. This means your personal guarantee will go into effect. In addition to paying back the loan, your personal guarantee also means you'll pay any legal fees the lender racked up while pursuing the guarantee.
Let's say you were to default on the loan. The lender might hire lawyers to help the court rule in their favor. Then, you would owe the money they spent on the lawyers, as well as what you owe for the loan.
Since you can't pay back the loan if your business has failed, your personal assets will be at risk. Depending on the agreement you signed, the lender might be able to claim your car, your house, your savings and retirement fund, and any other assets you may have.
The amount of collateral or guarantee is generally decided on beforehand - more on that later.
Why Are Personal Guarantees Required for SBA Loans?
Of course, personal guarantees aren't always required - it depends on the lender. Why would a lender ask for personal guarantees on business loans?
The SBA is already guaranteeing part of the loan, which might make the personal guarantee seem unnecessary. However, although the SBA's guarantee makes the loan less risky, it also doesn't cover the entire loan value. The SBA usually guarantees about 50 to 85 percent of the loan.
However, the percentage of the guarantee depends on your unique qualifications as an applicant, the nature of the loan, and the lender. The lender wants to know that the part of the loan that's not SBA-guaranteed will be paid back, too. The personal guarantee covers that other part of the loan.
This also ensures that as a business owner, you have a strong incentive to see the business succeed. If the business fails, you won't just be able to abandon the debt if you've personally guaranteed you'll pay it back.
Loans and Multiple Owners
If your business has more than one owner, who will guarantee the loan?
The SBA has set standards that say anyone who has a greater than 20 percent stake in the business should take part in the guarantee. The amount they'll be responsible for depends on the individual loan. However, no matter what, the bank wants to see that the entire loan value is guaranteed.
Personal Guarantees When You Don't Have Enough Assets
If you don't have enough personal assets to pledge toward paying back a business loan, it can become very hard to get the loan. However, it's still possible.
Whether or not you have the assets, it's important to know exactly what you're getting yourself into. Sometimes, your business status protects you from a failed business, such as a bankruptcy or bad business credit. However, once you've signed a personal guarantee, those protections don't apply. You're responsible for fulfilling the agreement, no matter what.
Need an SBA Loan Default Attorney?
Sometimes, people sign personal guarantees on business loans without really knowing what they're getting into. This can leave you feeling like you're trapped between a rock and a hard place.
An SBA loan default attorney can help you get free. Find out more about our SBA services here.