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Every so often, I get calls for my SBA Debt Settlement consulting business from people that claim they didn’t give a personal guarantee. And I always tell them the same thing: “in 10 years of doing nothing but SBA loans, I’ve never seen a business owner that NOT required to provide a personal guarantee. Bottom line: if you own the business, you are gonna have to personally guarantee the debt.
Here are some basics:
1) If you own 20% or more of the business, you are required to personally guarantee.
2) If spouses individually own less than 20%, but on a combined basis own more than 20%, each will be required to personally guarantee.
3) A lender may require an individual to personally guarantee if they are deemed to be critical to the operations of the business. This may be particularly true if the business has a key employee that, without whom, the business could not operate effectively. A good example would be a restaurant owner who relies on a manager with 20 years experience because the owner has limited experience.
4) A spouse who has no ownership interest in the business will be required to provide a limited guarantee if the SBA takes a lien on the home. The guarantee will, in most cases, be limited to their interest in the home. This requirement ensures that if a foreclosure is pursued by the bank, the non-owning spouse cannot fight it.
Ok, on to some questions:
My friend said they were not required to personally guarantee their SBA loan! So why do I have to?
Your friend is most likely wrong or they are not telling you the whole story. In my 10 years of SBA loan consulting, I have never seen an SBA loan that didn’t have at least one personal guarantor (or if not personal guarantor, the individual owner was named as the borrower). I’ve also never seen someone who was 100% owner not be required to personal guarantee.
Is there any way to avoid a personal guarantee?
I’ve seen ownership groups comprising 4 or 5 people all whittle down their ownership to less than 20%. As a result the bank only required the guarantees of the owners who were most active and crucial to the business. It’s important to keep in mind that the 20% requirement is a guideline. If its clear that the ownership structure was set up for no other reason than to avoid the personal guarantee, most lenders will end up asking for it.
Should I personally guarantee my friend or family members SBA loan?
If you do, you need to understand the consequences of personally guaranteeing an SBA loan. If the business fails, the bank will look to personal guarantors to repay the debt. As a general rule of thumb, the stronger the financial position of the guarantor, the more likely that the bank will come after them. I get calls all the time from people who say something to the effect of “it’s not fair, I had nothing to do with the business!” or “I never even made any money, I just did my friend/child/sibling a favor”. You need to understand that when you pledge your personal guarantee, the bank doesn’t care WHY you gave the personal guarantee. They also don’t care whether you were involved in the business, or if you make any money from the business. My advice: think long and hard about offering your personal guarantee, especially when you have no control over the business.
Jason Milleisen can answer your questions about applying and being approved for an SBA loan. Feel free to call (toll free 1-877-436-4533) or email me (firstname.lastname@example.org). If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.