When is an SBA Guarantee Legally Unenforceable
Book a Consultation CallObtaining commercial financing is one of the most difficult challenges facing small businesses. Many small businesses turn to SBA loan programs to finance their businesses.
Without adequate sources of collateral, the participating SBA lender and the SBA always require a personal guarantee before it agrees to approve a loan to the small business. While SBA lenders, banks, financing companies, or other SBA loan underwriters attempt to collect on a personal guarantee, there are certain circumstances where the SBA personal guarantee agreement may be legally unenforceable.
An SBA personal guarantee is a promise to pay a debt for another –which is usually the small business borrower. The SBA personal guarantor is the person making the promise – who is usually a member or shareholder of the small business borrower seeking the SBA loan. SBA Standard Operating Procedures (SOPs) state that participating SBA lenders are required to obtain the personal guarantees of individuals owning at least 20% of a small business’s interest or shares.
When you sign an SBA personal guarantee on behalf of an eligible small business, you agree to be personally responsible for repaying that SBA debt in the event the small business later becomes insolvent. For example: your small business manufactures and sells widgets, and it needs commercial equipment to do so. You go to an SBA lender and obtain financing for the commercial equipment, and part of the financing agreement contains an SBA personal guarantee. Sometime later, due to unexpected circumstances, your small business customers suddenly no longer need your widgets, and your small business fails as a result. If the SBA lender cannot recover the balance of its loan from the assets of your small business, it will then consider suing you personally for the remaining balance pursuant to the SBA personal guarantee you signed.
In other words, when you sign an SBA personal guarantee in order for your small business to receive a loan, you pledge your personal assets as collateral, including your home, the cash in your personal checking account, your savings and investments, and your future wages, which the SBA lender or SBA can try to seize.
SBA personal guarantees are a critical aspect of many SBA loan transactions, so entrepreneurs and small business owners should familiarize themselves with the potential consequences of signing one. In general, to be enforceable, SBA personal guarantee must meet certain criteria.
An SBA personal guarantee must be in writing and it must be signed by the SBA guarantor in the SBA guarantor’s personal capacity.
While this may be obvious, this cannot be overlooked. To be legally enforceable, the signatory to the SBA personal guarantee agreement must sign in his or her personal capacity and not as the “President” or “CEO” of the small business receiving the loan, which is its own legal entity, separate and apart from the people that run and operate it.
An SBA personal guarantee is not legally enforceable without consideration
In fact, no contract is legally enforceable without consideration. An SBA personal guarantee is a type of contract. A contract is an enforceable promise. The legal enforceability of a contract comes from one party’s giving of “consideration” to the other party. Here, the SBA lender gives an SBA-guaranteed loan (the consideration) in exchange for the SBA personal guarantor’s promise to repay it. In a lawsuit to collect a debt, the SBA lender must prove that it has the right to collect the debt, i.e., that it gave the loan (i.e., the consideration) to the debtor. Sometimes, the parties to an SBA loan transaction cannot produce documents showing a right to collect; this may be attributable, at least in part, to the number of times that SBA loans are resold on the secondary market or assigned to other counterparties.
An SBA personal guarantee may be legally unenforceable if it was obtained under fraudulent circumstances or it violates federal law or public policy.
Under certain circumstances, an SBA personal guarantee may be found to legally unenforceable if, for example, it was required from a business owner’s spouse who was not an owner, shareholder, officer or employee of the small business. Obtaining a spousal guarantee under certain circumstances may violate the Equal Credit Opportunity Act (ECOA) and could render the SBA personal guarantee signed by the spouse void.
Can an SBA personal guarantee be revoked?
An otherwise valid and legally enforceable SBA personal guarantee can be revoked in several different ways. An SBA personal guarantee much like any other contract, can be revoked if both the SBA guarantor and the SBA lender agree (with the SBA’s approval) in writing. Some debts owed by SBA personal guarantors can also be discharged in bankruptcy or declared invalid pursuant to court order through litigation.
Many factors can affect the legal enforceability of SBA personal guarantees. If you have any questions about the legal enforceability of an SBA personal guarantee that you are about to sign or have already signed, consult with one of our experienced SBA debt attorneys who can assess your situation and offer thoughtful and practical guidance to assist in your decision.
Contact us today to set up an appointment to discuss your SBA loan issues and problems.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients personally guaranteed an SBA 7(a) loan that was referred to the Department of Treasury for collection. Treasury claimed our clients owed over $220,000 once it added its statutory collection fees and interest. We were able to negotiate a significant reduction of the total claimed amount from $220,000 to $119,000, saving the clients over $100,000 by arguing for a waiver of the statutory 28%-30% administrative fees and costs.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
Our firm successfully negotiated an SBA offer in compromise (SBA OIC), settling a $974,535.93 SBA loan balance for just $18,000. The offerors, personal guarantors on an SBA 7(a) loan, originally obtained financing to purchase a commercial building in Lancaster, California.
The borrower filed for bankruptcy, and the third-party lender (TPL) foreclosed on the property. Despite the loan default, the SBA pursued the offerors for repayment. Given their limited income, lack of significant assets, and approaching retirement, we presented a strong case demonstrating their financial hardship.
Through strategic negotiations, we secured a favorable SBA settlement, reducing the nearly $1 million debt to a fraction of the amount owed. This outcome allowed the offerors to resolve their liability without prolonged financial strain.
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