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Are Shareholders Liable for a Default on an SBA Loan?

Explore shareholder liability for SBA loan defaults. Learn about ownership thresholds, guarantees, and safeguarding your investment in a complex financial landscape.

Understanding Your Financial Responsibility as a Shareholder

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.

Basics of SBA Loans

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.

Are Shareholders Automatically Liable?

Debunking Automatic 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.

Role of Guarantees in Liability

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 Ownership Threshold and Liability

SBA’s Ownership Rules

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

Implications of Ownership

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.

Spousal Involvement and Liability

Combined Ownership Considerations

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)).

Spousal Guarantees in Practice

Protect Law Group advises clients on navigating combined ownership scenarios, ensuring they understand the implications for liability and financial planning.

Minority Shareholders and Liability

Owning 5% or Less

Shareholders with less than 5% ownership are generally not required to provide personal guarantees. However, lenders may request guarantees in specific cases.

Protecting Collateral Interests

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.

Navigating Financial Responsibilities

Assessing Your Liabilities

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.

Communicating with Lenders

Open communication with lenders is essential. Protect Law Group helps clients navigate lender requirements, ensuring transparency and avoiding surprises.

Planning for Future Investments

Risk Assessment and Decision-Making

Evaluate investment decisions based on potential liability. Protect Law Group assists clients in balancing risks and returns, considering ownership structures and obligations.

Seeking Professional Advice

Consulting legal and financial experts is crucial. Protect Law Group offers tailored guidance to help clients protect their assets and make strategic investment decisions.

Conclusion: Safeguarding Your Investment

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.

Are Shareholders Liable for a Default on an SBA Loan?

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.

Frequently Asked Questions

Are shareholders automatically liable for a company's SBA loan default?

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.

What is the role of an Unconditional Guarantee in shareholder liability?

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.

What ownership percentage triggers a personal guarantee requirement for SBA loans?

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.

How does spousal ownership affect liability for SBA loans?

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)).

Are minority shareholders with less than 5% ownership liable for SBA loans?

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.

What steps can shareholders take to assess and manage their liabilities for SBA loans?

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.

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

Client’s small business obtained an SBA 7(a) loan for $150,000.  He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made.  The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.

$488,000 SBA 7A LOAN - SBA OHA LITIGATION

$488,000 SBA 7A LOAN - SBA OHA LITIGATION

The clients are personally guaranteed an SBA 7(a) loan.  The SBA referred the debt to the Department of Treasury, which was seeking payment of $487,981 from our clients.  We initially filed a Cross-Servicing Dispute, which was denied.  As a result, we filed an Appeals Petition with the SBA Office of Hearings and Appeals asserting legal defenses and supporting evidence uncovered during the discovery and investigation phase of our services.  Ultimately, the SBA settled the debt for $25,000 - saving our clients approximately $462,981.

$298,000 SBA 7A LOAN - NEGOTIATED WORKOUT AGREEMENT

$298,000 SBA 7A LOAN - NEGOTIATED WORKOUT AGREEMENT

Clients obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA.  Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice.  Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt.  After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.

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