Protecting your assets from Personal Guarantee

April 09, 2021

by a searcher from University of Dallas in Houston, TX, USA

Due to a previous life (or three) I have had the wonderful opportunity to build up (what is for me) a significant amount of personal assets. I want to step back into the owner's chair for another round and it looks like taking on SBA debt is the way to go. The upside is clearly greater.

Understanding that there will be personal guarantees involved - what is the best way to protect my assets. I care more about playing the game than I do about my wealth, but for my family I've already worked to build something for them, I need to make sure that that risk of any PGs doesn't extend to my family's assets. What is the best way searchers have found to protect what they have already so they can play the game in the best way possible.

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Reply by a searcher
from University of Southern California in Portland, OR, USA

@Ted, I actually think the opposite is true at least for SBA loans. SBA lenders are primarily lending money based on the cash flow and assets of the business -- not the assets of the buyer. For buyers with meaningful assets, I think you absolutely want to limit what's covered by the PG. For example, take out a HELOC on homes you own so your equity drops below the banks threshold (~20-25%). Banks won't put a lien on your homes if your equity is low and there are 2 existing liens (mortgage and HELOC).

Buyers with low net worths actually have a higher expected value on an acquisition with an SBA loan. The upside is the same for both buyers. However, the downside is worse if you have more assets to lose. Say you have a PG for $4 million and a net worth of $3 million. If you default, you lose $3 million. If you only had a $100k net worth, then you only lose $100k in a default.

Reply by a searcher
from Massachusetts Institute of Technology in Denver, CO, USA

If your goal is to protect your family’s assets, there are a few ways to do it, but needs to be executed BEFORE you sign the SBA loan. If you are married and don't have a pre-nup, then get a pos-nup signed with your partner where all your assets and liabilities do not communicate. Also, another way is to create a Trust in a jurisdiction that protects against creditors (like delaware). Transfer the assets to that irrevocable trust, and make your family beneficiary. All this will protect your family, but at the same time will limit your ability to control your wealth. But I can guarantee if you have a PG in place, and your business go under, you would be happy to have taken those “extreme” measurements highlighted above. Do keep some wealth on your name, as SBA will probably require that you have some assets at time of loan underwriting.

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