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 personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
Client personally guaranteed SBA 7(a) loan for $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
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