Is there a market for people willing to sign an SBA personal guarantee ?

January 06, 2021

by an investor from University of California, Berkeley - Haas School of Business in San Francisco Bay Area, CA, USA

I'm an independent sponsor looking at a target that would be perfect for an SBA loan (low risk, low price, stable cash flow business). However, I am personally not comfortable signing a personal guarantee due to owning significant personal assets. Banks will only provide ~ 40% leverage on a non-recourse basis instead of the 90% that is possibly with an SBA loan.

Is there a market for people willing to sign a PG in return for a 21% ownership stake and a management job at the target company? This might be very appealing to someone who does not have material wealth because the SBA would simply forgive the SBA loan in a downside scenario. At the same time, the person would get rewarded for the risk with a significant equity stake and a management position.

Any feedback would be appreciated.

Reply by a lender
from University of Missouri in St. Louis, MO, USA

Legally you could probably get away with this. However, any lender that does SBA loans would be putting themselves in a bad spot if they knowingly participated in something like this. The SBA has called this out in the past, albeit they have been vague, on structures like this. You would also need a lot more owners since 21% to the guarantor would mean there is 79% still owned by you and other partners. Lastly, if you choose to do this with a lender with looser structural controls, make sure the individual knows what their PG means. You mention that the SBA would forgive the loan. That isn't how a liquidation would work. The bank would have to pursue all avenues before they go to the SBA for the guarantee. That means this individual would likely have to file a BK for the loan to be discharged.

Reply by a searcher
from Rice University in Houston, TX, USA

If I am not mistaken everyone owning 20% or more has to sign a personal guarantee. Note that many states are debtor friendly and protect assets such as home equity and retirement accounts. One may consider setting up living trust to protect other assets. However at some point something will have to be leveraged to take on this risk.

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