SBA loan PG risks

September 26, 2023

by a searcher from Liberty University in Austin, TX, USA

I've searched the forum and found great info on the SBA program, but most posts and discussions revolve around finding a loan without a PG. Given my search parameters, I don't anticipate that being an option for me, so I'm hoping to get some guidance on two things:
1) What is the worst case scenario if the company folds?
2) What actually happens to the guarantor when a company folds?

I've heard advice ranging from "SBA and the bank will work hard to keep you solvent as long as you communicate" to horror stories of businesses going under due to the weight of loans on the P&L.

Nobody plans to make a bad purchase, and I am being exceptionally conservative in my modeling (looking for 1.5x coverage tested at 12%), but there's always a possibility that things go south. With that in mind, I'd like to understand what is likely to happen if I default on a large loan (likely $3m). A few questions I'm hoping for guidance on:
- Is it true that (in TX) your home is off limits if you default?
- Is insurance (the SBA version of PMI — whatever it's called) optional, and what does it actually do for you?
- Can they do things like garnish wages if you don't have anything they can take?
- Are there any protections like filing bankruptcy that you can use to avoid being in dept forever?

Reply by a searcher
from Western Governors University in Atlanta, GA, USA

Hi Taft - I would suggest you search Spotif for some of the podcasts by Lisa Forrest. She's also pretty active on here. The short answer is yes, they can and they will try to take your home. While it's harder to force a sale of a home in texas, that doesn't mean they cannot do it. (FYI - I'm not a lawyer.). Note also that the homestead exemption doesn't include mortgage companies and if your small business goes BK, then they will take your home. Yes, you can discarge debts in bankruptcy. But note also the SBA has a very low default rate. So I would suggest you focus on conservative leverage ratios and also enduring profitability. Working with someone line Lisa or pioneer capital might be a good idea to help you think through these risks.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would be happy to discuss your concerns and the risk involved at any time. The truth is that there are always risks with a personal guarantee. Depending on what assets you have the risks might not be that great, but lenders and the SBA can pursue you in a default. You can reach me here or directly at redacted

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