SBA Personal Guarantee on Preferred Equity Investor?
January 30, 2020
by a searcher from IE Business School in Seattle, WA, USA
Hi Everyone,
I'm very early in my research phase but I have a question related to the SBA personal guarantee. I understand it applies to anyone that owns > 20% of the company, but it's unclear to me whether that applies to all types of equity or only common equity.
By way of a simplified example: Suppose the CEO/Searcher puts in $100k as common equity, an Investor puts in $100k as preferred equity (coupon doesn't matter right now but assume it comes with one), & then $800k comes from an SBA loan. The Investor is passive, or at most provides some advisory/guidance, so s/he is not actively involved in the day to day operations. Would the SBA require a personal guarantee from the Investor? I know the CEO/Searcher won't be able to avoid it but I'm prepared for that.
Thanks for your thoughts & advice!
James
from The University of Auckland in Los Angeles, CA, USA
1. No they sell the unsecured as well as I mentioned above - they carry zero risk on the loan. They bundle these as BBB securities. See here - https://seekingalpha.com/article/###-###-#### newtek-investment-bank-rather-bdc
Newtek is great as they're listed so you can see exactly how they do. The profit is###-###-#### % on the secured.
They definitely do this to de-risk as well.
2. Government innovates - SBA innovates. You can email SBA now, you couldn't when the program started. Innovation will continue, bring it on.
3. My point is that bankers do not have a special power to select future winners - if they could they would be stock pickers (Buffett et al). So credit discretion is highly curtailed - mainly it's based on prescribed criteria (which will be come AI algorithms in near future), with little or no room for 'discretion'.
It's already happening with smaller lenders - they approve you in seconds as it's all algorithms. I recently used a smaller bank for this and funds were received in about 60 seconds from time of approval. Like it or not that's the future and it's coming fast - can't wait!
I'm proposing that SBA require publication of their internal criteria as a pre-condition for participation in SBA guarantee program. I think it would be much more efficient and beneficial for borrower, lender and SBA than current guessing game. Current state is like the 'Battleships' game played in the 80's, just wild guesses until you get a hit. as there is so much misinformation and confusion.
Surrendering to current system as best of all possible worlds is the ideology of despair. We can do better!
from The University of Auckland in Los Angeles, CA, USA
Bank make own rules regardless of SOP. 7 months later I've pieced together enough info to structure my deal - a nightmare of misinformation and misrepresentation. Should have taken 2 hours but information scattered across 70 lenders. I'm not alone in this, most people just give up after 20 banks. 95% of bank staff don't know their own programs. Credit is disconnected from sales so representations are made and broken.
Lenders should just be up front about their current lending policies (would save everyone countless weeks, especially bank staff). It would actually save banks money and time to do this. SBA is not new, this should have been done decades ago. Participating lenders should be required to provide their lending rules to SBA for publication to community = transparency. By default Searchfunder platform is assuming that function. More power to Searchfunder!