Marcus 1 year, 6 months ago
Personal Guarantee with < 20% Ownership?
I am the minority owner of a small business that required a significant SBA loan. A month before closing more money was needed to complete construction & open for business so my partner/lender requested my name on the loan. Now that the loan is at risk of default I have the most exposed assets. My question is should I have been required to become a co borrower even though the business plan the bank clearly states my minority ownership of 15%? Do I have legal grounds to have my personal guarantee removed?3 Replies
Dock David TreeceMember1 year, 6 months ago
Thanks for the question. If you already signed a personal guarantee on your SBA loan, it’d probably be pretty tough to have it taken off. However, there are a few notes.
First, one of the big things that make SBA loans so attractive is that the SBA guarantees a portion of your loan. This means that – if your company were to default – you and your partners probably wouldn’t be personally responsible for the full loan amount. The amount that the SBA guarantees varies, so you’d need to check your loan documents.
Another item to consider is whether your current loan is in default because your business is struggling or for other reasons. For example, if one of your partners misappropriated loan funds, that may be cause for you to disclaim responsibility for the loan.
If, however, your business is actually doing well and you are falling behind on SBA loan payments for other reasons (a bad payment schedule, for example), then you might consider arranging new financing to pay off the old loan and move forward. You might also try contacting the SBA for a loan adjustment, but the odds of getting much relief probably aren’t that great.
Sorry to hear about your recent troubles. If you want to look at different kinds of SBA loans to see whether refinancing may be a good option, be sure to check out our article on the 6 Types of SBA Loans here: https://fitsmallbusiness.com/types-of-sba-loans/
Jason MilleisenParticipant10 months ago
I realize this question is from 8 months ago, but your question is a common one, so hopefully others that read this answer will get the information they need.
Regarding your question about having legal grounds to remove your guarantee because you were only a 15% owner, I don’t think that’s going to hold much water. A lender has the right to require a guarantee of any employee or manager of the company regardless of their ownership percentage. While it is true that the SBA requires any owner of 20% or more to personally guarantee, it doesn’t mean that they can’t require someone who has less ownership if they are important to the success of the business.
I also wanted to make mention of something else that is critically important here. In his answer above, Dock is incorrect about how an SBA guarantee works. This is a misconception that I see from time to time. I’ve even written an entire article about it here
An SBA guarantee does NOT relieve you of personal obligation if you sign a personal guarantee. All that a 70% SBA guarantee means is that the lender is reimbursed for 70% of the loan balance at the time of default. It has no bearing on what you owe. So if the loan you take is defaulted on, anyone who personally guaranteed will be liable.
I hope this helps future people who see this post, as understanding what you are signing up for with an SBA is very important. It’s one thing to understand the risks and accept them. It’s quite another to have no idea what the risks are.
Marsha KellyParticipant9 months, 3 weeks ago
I am sorry to hear about your situation, although it is fairly common. Here is my list of FAQ answering many entrepreneur’s questions – Should I Sign a Personal Guarantee for a Business Loan?