SBA loan personal guarantee when a solo 401(k) is one of the investors

February 05, 2023

by an investor from New York University in St. Louis Metropolitan Area, USA

I am an investor and want to help a searcher acquire a business. My solo 401(k) will invest a certain amount in exchange for 35% of the business. Since the searcher will be using an SBA loan, anyone holding 20% or more of the shares is normally required to provide a personal guarantee. However, since my 401(k) is the entity that will be investing, 401(k) rules prohibit any personal guarantee. So, in this case, will the SBA waive the requirement? If not, what is the solution to these conflicting requirements?

Reply by a lender
from Trinity College Connecticut in Boston, MA, USA

Unfortunately, any > 20% shareholder of a company receiving an SBA loan is required to provide a personal guarantee. I believe you are referring to the 2016 court case, James E. Thiessen et ux. v. Commissioner; 146 T.C. No. 7; No###-###-#### , where the IRS ruled that a personal guarantee from a Solo 401K or IRA owner is a prohibited transaction and if done would have dire tax consequences to the Solo 401K or IRA holder. As you probably know a ROBS 401K can be used for a down payment with an SBA loan and the personal guarantee of the SBA loan is not only allowed by the IRS, but required by the SBA. The fact that a personal guarantee is not allowed when using a Solo 401K or IRA is irrelevant with regard to an SBA loan, as the SBA SOP does require a personal guarantee from any > 20% shareholder.

Reply by a searcher
from IMD in Amsterdam, Netherlands

We provide debt finance against a surety bond >250k. No PG’s , no heave DD. Time to capital###-###-#### days depending of loan facility.
PM for more details

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