Explore shareholder liability for SBA loan defaults. Learn about ownership thresholds, guarantees, and safeguarding your investment in a complex financial landscape.
Have you ever wondered about your financial responsibility as a shareholder in a company that defaults on an SBA loan? This is a common concern for many investors and business owners. Protect Law Group, a law firm specializing in SBA loan issues, helps unravel the complexities surrounding this topic, providing clarity on when shareholders might be liable for such defaults.
The Small Business Administration (SBA) offers loan programs to help businesses access capital for growth and sustainability. These loans, backed by government support, often come with more favorable terms than traditional loans. Typically, the borrowing business entity is responsible for repayment. However, shared ownership structures can complicate liability.
As a shareholder, simply owning shares or units of interest in a company does not automatically make you liable for its debts, including SBA loan defaults. This protection applies to corporations and LLCs, where personal assets are generally separate from business liabilities.
Liability arises if you sign an Unconditional Guarantee agreement, such as the SBA Form 148. This agreement establishes personal liability for loan repayment, independent of your shareholder status. Protect Law Group advises clients on understanding and negotiating such agreements to minimize personal risk.
The SBA requires personal guarantees from all owners with at least a 20% stake in the borrowing entity. If you own 20% or more, you will likely need to sign a personal guarantee.
Ownership Percentage Required to Sign Personal Guarantee? Less than 20% No 20% or More Yes
Understanding this threshold is crucial for shareholders and potential investors. Protect Law Group helps clients assess their financial stake and liability, ensuring informed decisions about their investments.
If you and your spouse collectively own 20% or more of a company, both may be required to sign a personal guarantee, even if individual ownership is less than 20%. This is outlined in the SBA's Standard Operating Procedures (SOP 50 10 5(J)).
Protect Law Group advises clients on navigating combined ownership scenarios, ensuring they understand the implications for liability and financial planning.
Shareholders with less than 5% ownership are generally not required to provide personal guarantees. However, lenders may request guarantees in specific cases.
Lenders may seek guarantees to secure collateral interests. In such cases, an Unconditional Limited Guarantee (SBA Form 148L) may be used, limiting liability to the collateral.
Investing in a business with an SBA-backed loan requires careful assessment of potential liabilities. Protect Law Group provides expert advice to help clients understand agreements and align them with their risk tolerance.
Open communication with lenders is essential. Protect Law Group helps clients navigate lender requirements, ensuring transparency and avoiding surprises.
Evaluate investment decisions based on potential liability. Protect Law Group assists clients in balancing risks and returns, considering ownership structures and obligations.
Consulting legal and financial experts is crucial. Protect Law Group offers tailored guidance to help clients protect their assets and make strategic investment decisions.
Understanding your potential liability as a shareholder is key to protecting your investments and personal assets. Protect Law Group specializes in helping clients navigate SBA loan complexities, ensuring clarity on ownership percentages and guarantee agreements. With informed decisions and professional support, you can minimize liabilities and maximize gains.
Understanding your financial responsibilities as a shareholder in a company with an SBA loan is crucial. Protect Law Group specializes in helping individuals and businesses navigate the complexities of SBA loan obligations. Whether you're concerned about personal guarantees, ownership thresholds, or spousal liabilities, their experienced SBA attorneys provide tailored solutions to safeguard your investments and personal assets. Contact Protect Law Group today at (833) 428-0937 for a case evaluation and expert guidance on managing your SBA loan concerns effectively.
No, shareholders are not automatically liable for a company's SBA loan default. If you are a shareholder who has invested by purchasing shares or units of interest, your personal assets are generally protected and distinguished from the business's debts. However, liability may arise if you have signed an Unconditional Guarantee agreement.
An Unconditional Guarantee is a legal agreement that makes you personally liable for the repayment of an SBA loan if the company defaults. This liability stems from the guarantee agreement itself, not your status as a shareholder. It is typically documented on SBA Form 148.
The SBA requires a personal guarantee from all owners who hold at least a 20% stake in the borrowing entity. If you own 20% or more of the company, you will be required to sign a personal guarantee as part of the loan agreement. Owners with less than 20% ownership are generally not required to provide a guarantee.
If you and your spouse collectively own 20% or more of the company, and your spouse owns at least 5%, both of you may be required to sign a full personal guarantee. This combined ownership threshold is outlined in the SBA's Standard Operating Procedures (SOP 50 10 5(J)).
Minority shareholders with less than 5% ownership are generally not liable for SBA loans. However, in certain cases, lenders may request a guarantee, especially if collateral is pledged and a lien needs to be perfected. In such scenarios, an Unconditional Limited Guarantee (SBA Form 148L) may be required, limiting liability to the collateral interest.
Shareholders should carefully review all loan agreements and guarantee documents before signing. Seeking financial and legal advice can help you understand your potential liabilities and align them with your risk tolerance. Open communication with lenders is also essential to clarify requirements and avoid surprises. Regularly monitoring the financial health of the business can further safeguard your investment.
Client received the SBA's Official 60-Day Notice for a loan that was obtained by her small business in 2001. The SBA loan went into default in 2004 but after hearing nothing from the SBA lender or the SBA for 20 years, out of the blue, she received the SBA's collection due process notice which provided her with only one of four options: (1) repay the entire accelerated balance immediately; (2) negotiate a repayment arrangement; (3) challenge the legal enforceability of the debt with evidence; or (4) request an OHA hearing before a U.S. Administrative Law Judge.
Client hired the Firm to represent her with only 13 days left before the expiration deadline to respond to the SBA's Official 60-Day Notice. The Firm attorneys immediately researched the SBA's Official loan database to obtain information regarding the 7(a) loan. Thereafter, the Firm attorneys conducted legal research and asserted certain affirmative defenses challenging the legal enforceability of the debt. A written response was timely filed to the 60-Day Notice with the SBA subsequently agreeing with the client's affirmative defenses and legal arguments. As a result, the SBA rendered a decision immediately terminating collection of the debt against the client's alleged personal guarantee liability saving her $50,000.
Our firm successfully resolved an SBA COVID-19 Economic Injury Disaster Loan (EIDL) in the original amount of $150,000 for a Florida-based borrower. The loan, issued on June 4, 2020, was secured by business assets and potential personal liability through the SBA's Security Agreement.
Following the permanent closure of the business, we guided the client through the SBA’s Business Closure Review process and prepared a comprehensive collateral analysis. We negotiated directly with the SBA, obtaining a full release of the business collateral for $2,910 — satisfying the borrower’s obligations under the Security Agreement and eliminating any further enforcement risk against the pledged assets.
Clients executed personal and corporate guarantees for an SBA 7(a) loan from a Preferred Lender Provider (PLP). The borrower corporation defaulted on the loan exposing all collateral pledged by the Clients. The SBA subsequently acquired the loan balance from the PLP, including the right to collect against all guarantors. The SBA sent the Official Pre-Referral Notice to the guarantors giving them sixty (60) days to either pay the outstanding balance in full, negotiate a Repayment (Offer in Compromise (OIC) or Structured Workout (SW)), challenge their alleged guarantor liability or file a Request for Hearing (Appeals Petition) with the SBA Office of Hearings & Appeals.
Because the Clients were not financially eligible for an OIC, they opted for Structured Workout negotiations directly with the SBA before the debt was transferred to the Bureau of Fiscal Service, a division of the U.S. Department of Treasury for enforced collection.
The Firm was hired to negotiate a global Workout Agreement directly with the SBA to resolve the personal and corporate guarantees. After submitting the Structured Workout proposal, the assigned SBA Loan Specialist approved the requested terms in under ten (10) days without any lengthy back and forth negotiations.
The favorable terms of the Workout included an extended maturity at an affordable principal amount, along with a significantly reduced interest rate saving the Clients approximately $181,000 in administrative fees, penalties and interest (contract interest rate and Current Value of Funds Rate (CVFR)) as authorized by 31 U.S.C. § 3717(e) had the SBA loan been transferred to BFS.
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