SBA Personal Guarantees

May 31, 2022

by an investor from Hamilton College in Port Orange, FL, USA

Does anyone know of any helpful guides or resources surrounding personal guarantees with SBA lending? I am looking to gain a better understanding in order to get comfortable with the associated risk.

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

This is a common question from most first time SBA borrowers. The personal guarantee required on an SBA 7A loan does come with some risk. In general you are held personally liable should you a default occur and there is a loss on the loan. If there is a default what typically happens is the collateral gets liquidated, the Bank then goes to the SBA on any loss they have and the SBA covers the guaranteed portion of that loss. The SBA then has the right to pursue the Guarantor(s) for that loss at that point or any time in the future. However, from our past experience in most default situations if the Borrower is up front and works with the lender and cooperates with the liquidation, usually a deal is struck between the lender, Guarantor and SBA. Such a deal is called an "Offer and Compromise". Under that situation the Guarantor makes an offer along with providing an updated personal financial statement and potentially other supportive documents. Usually that offer involves the Guarantor making some sort of payment as part the settlement to get out of their guarantee as part of the liquidation. I saw many of these agreements following the Great Recession and in most cases the SBA would accept the offer or would accept an offer after some negotiation. However, if you have substantial assets and enough to cover the shortfall, the SBA might not accept the offer and could choose to pursue collection. Please keep in mind retirement accounts are a protected asset class by law from personal guarantees.

If a Borrower just walks away and does not cooperate with the lender it would be more likely the SBA might come after them in the future. However, the cost to pursue someone is not cheap, so from our experience the SBA like many lenders do not typically like pursuing personal guarantees unless they think they can get something out of it. First, they need to sue you personally for the default. Once they get a judgement, they then need to pursue collection on that judgement, which is a separate court action. That can require discovery of assets and other items. It can be a waste of money for lenders if the Borrower does not have any assets in the end. The Borrower also has a potential protection in that they could file bankruptcy if they do not have sufficient assets.

Now, if you have pledged your home or other assets as additional collateral that is a whole different situation. Those liens will stay in place unless you get the SBA to agree to an "Offer & Compromise" that releases those assets. Again, from experience lenders and the SBA would prefer not to have to foreclose on someone's home because it is expensive and they would have to be prepared to take out lenders in front of them to get possession if there are not other bidders at time of sale, but if there is sufficient equity they will do it. If at the end of the day there is not sufficient equity to cover the second mortgage, then Bankruptcy might still be an option for the Borrower to clear out some of the debt. But usually these type of things get worked out in the "Offer & Compromise" stage.

If you default and the government has a loss, that loss will stay on the governments' books unless you come back at a future date and pay it off. That loss will restrict you from borrowing from the government in the future and will disallow you from getting SBA financing again unless paid off.

Just to be clear, the above is not legal advice. The above is how I have seen things go down in workouts in the past. Each situation is unique and you have to understand the risks you are taking with your personal guarantee and whether they are worth it for the transaction you are contemplating. In many cases the benefits from a term and down payment perspective of SBA financing outweigh the risks for most people, but that is each individual Borrower's decision. However, even if you choose to use conventional financing it is still likely a traditional bank is going to require a personal guarantee as well. If you want to talk about your individual situation or you have more questions I am more than happy to answer them at any time. I can be reached at redacted

Reply by a searcher
from Texas A&M University in Irving, TX, USA

I have had many discussions about this with my wife and business partner. It is a tough pill to swallow for sure, but where we ended up is that any kind of loan we take should be paid back regardless of guarantees so make sure the business is solid. I found this Nerd Wallet post interesting diving into what types of businesses ended up defaulting - https://www.nerdwallet.com/article/small-business/study-1-in-6-sba-small-business-administration-loans-fail

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