Are SBA Loans Personally Guaranteed?

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by Corey Philip //  February 2, 2023

SBA loans are ideal when you want to expand your small business. Although, they do have downsides you need to be aware of.

Particularly when you place your personal assets at risk to cover the loan if your business defaults on loan repayments.

SBA loans are typically personally guaranteed to mitigate the potential risk of lending funds to a small business. However, that may need more business collateral. In addition, other business shareholders might also be required to sign limited or unlimited personal guarantee loan agreements.

Even though applying for an SBA business loan may seem straightforward - apart from all the paperwork. That is, unfortunately, not the case. Most SBA loans require you to provide a personal guarantee that the loaned amount will be paid in full, which can be risky. Especially if you don’t consider the following pertinent factors.

So, read on if you want to make a sound business decision!

in this article:
Why SBA Loans Are Personal Guaranteed
Who is Liable for SBA Personal Guarantees?
When are SBA Loan Personal Guarantees not Required?
Personal Guarantee: Key Considerations
Final Thoughts

Why SBA Loans Are Personal Guaranteed

Most SBA loans require you to provide a personal guarantee that the loaned amount will be paid in full, which can be risky. Especially if you don’t consider the following pertinent factors.

Like most lenders, Small Business Administration (SBA) requires a personal guarantee as an additional security measure to diminish the risk of a loan not being paid by a business. Thus, if your business cannot service the loan and make payments to reduce the loan, you might be held personally responsible for servicing the debt.

SBA Loans

(Source: sba.gov)

However, SBA may also require more personal guarantees from your other stakeholders who have shares in your business if you apply for a massive loan. Even if you have enough business collateral to cover the loan amount.

The Difference between Limited and Unlimited Personal Guarantees

Like they say: knowledge is power! Thus, it’s essential to understand what limited and unlimited personal guarantees entail before you sign on the dotted line.

So, here's a quick rundown on unlimited versus limited personal guarantees:

  • Limited Personal Guarantees: In stark contrast, limited personal guarantees mainly apply to more than one personal guarantor or in cases where several business shareholders signed SBA loan agreements. This type of loan agreement limits each guarantor's percentage or dollar amount in terms of the total borrowed amount. And depending on the terms of the loan agreement, SBA could stipulate terms like a joint personal liability where all the guarantors are personally liable for a quarter of the loaned amount or the entire loan amount.
  • Unlimited Personal Guarantees: This type of SBA loan agreement means that if your business cannot pay the loan, you will have to pay it back in full on behalf of your business. Therefore, should you sign a complete SBA personal guarantee agreement for $100 000, you will need to pay back the total amount.

Who is Liable for SBA Personal Guarantees?

While there are instances where SBA require limited personal guarantees, they typically need unlimited personal guarantee loan agreements from any stakeholder who has a 20% business share.

Although, the SBA may also insist that anyone with a 15% share in your business enter an unlimited or limited personal guarantee agreement. SBA may also require unlimited personal guarantees from:

  • Trusts: with at least 20% business shares.
  • Corporations: that possess 20% or more business shares.
  • Spouses: if they own 5% or more of a business or 20% shares together as a married couple. 
  • Trustors: in instances where the trust has 20% or more shares in the business, they are revocable.

However, if no one holds at least 20% of the business shares, one or two business owners must enter into a complete personal guaranteed agreement to safeguard the loan repayment.

When are SBA Loan Personal Guarantees not Required?

Even though personal guarantees are typically required for most Small Business Administration loans like 504/CDC, microloans, or SBA 7(a) loan agreements, there are some exceptions.

Disaster assistance loans don’t require personal guarantees if your business is in an area that has officially been declared by the US government as a disaster area.

Types of disaster loans

(Source: sba.gov)

And you also qualify for an SBA disaster loan if your home has been damaged by a natural disaster like a wildfire, hurricane, or flooding. Including damages incurred due to civil unrest.

SBA disaster assistance loans apply to:

  • Operational business costs would've been covered if the disaster had not occurred.
  • Business and personal losses that your insurance or Federal Emergency Management Agency funding did not cover.

While disaster loans that don’t require personal guarantees are typically capped at $25,000. Business owners may apply for COVID-19 Economic Injury Disaster Loans for up to $200,000.

Personal Guarantee: Key Considerations

Even though most SBA loans require personal guarantees, it’s essential to "tread with caution" and consider the following aspects:

  • Consider your personal assets and whether you could repay the loan. Even if your business is thriving, you only need the loan to expand your operations.
  • Review the loan requirements in detail, even the "fine script," and consider whether the guarantor terms are reasonable and whether the added risk is worth it.
  • Cashflow or the business's ability to service a loan, is also essential. So, you need to be confident that your business can meet its financial obligations and that there are enough funds to honor a loan agreement once all your operational expenses have been entirely covered.
  • Business collateral is yet another critical consideration. If your business owns expensive real estate or equipment, using that as collateral instead of a personal guarantee might be more beneficial. And less risky. Mainly if your business is financially sustainable.
  • Do a risk assessment to determine whether the risks associated with being a personal guarantor are worth it. In other words, consider whether the loan is necessary to grow your business and, if so, how much you would need to make that happen.
  • Consider your credentials while it is true that you will be more likely to get a business loan with a personal guarantee. You could qualify for a business loan, coupled with a competitive interest rate, without signing a personally guaranteed agreement if you are well qualified. So, it’s essential to consider your loan options and shop for the most beneficial loan agreement.

So, you need to review your personal finances and ensure you have enough savings or assets to cover the loan amount in an unforeseen, worst-case scenario.

Most importantly, consider whether you have the financial means to replace any personal assets that may be at risk due to a personal guarantee loan agreement.

Final Thoughts

SBA loans typically require personal guarantees, which means that should your business default on loan repayments, all guarantors are personally liable for that debt. So, it's vital to do your due diligence and do a thorough risk assessment, as you may place your financial wellness at risk.

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About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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