SBA PG Requirements

November 13, 2024

by a searcher from University of Pennsylvania - The Wharton School in Los Angeles, CA, USA

Lenders of SearchFunder - is there a good primer on the PG requirements for an SBA loan? I find that it's something not commonly discussed. Please see some questions below:

1) Are there scenarios where the guarantee could be limited or reduced over time, such as meeting certain performance thresholds or milestones?
2) What personal assets are considered part of the guarantee? Are revocable trusts considered part?
3) If my spouse and I have joint assets, but they're not used for the down payment, how are they treated? We live in a community property state FWIW
4) What is the treatment of a house/property for purposes of the SBA PG? What happens if it's bought before or during the loan period?
5) Are there other protections or financial planning strategies that Searchers should consider to mitigate the impact of a PG?
6) Is PG insurance a thing in the US? If so, please send links!

Reply by a lender
from University of Missouri in St. Louis, MO, USA

1) Are there scenarios where the guarantee could be limited or reduced over time, such as meeting certain performance thresholds or milestones? No, as long as the SBA loan is outstanding then the PG will be in place. As an aside, I did commercial lending as well for 20 years. Almost every small business loan has a PG, conventional or SBA. The main reason is that small businesses are heavily dependent on the owner. If you want to own a business and have debt form a bank, you are likely going to have a PG 2) What personal assets are considered part of the guarantee? Are revocable trusts considered part? It depends on what you mean by "considered." The bank will take a lien on any real estate owned by you and/or you and a spouse with >25% equity. Many banks take the real estate even without equity, but it isn't required. In terms of what is at risk in a default, that would be everything other than retirement accounts. You would need to speak with an attorney about what would be at risk in a BK, but the lender can enforce the guarantee on your assets in court. Then it is up to the judge on what is in play 3) If my spouse and I have joint assets, but they're not used for the down payment, how are they treated? We live in a community property state FWIW Legal more than banking question, but the real estate pledge would still be required. I don't know a scenario where the spouse wouldn't be on the hook, either directly or indirectly if the PG comes into play 4) What is the treatment of a house/property for purposes of the SBA PG? What happens if it's bought before or during the loan period? See above on the house. Anything done AFTER the loan would not be pledged as collateral. It only matters what you have at the time of closing. 5) Are there other protections or financial planning strategies that Searchers should consider to mitigate the impact of a PG? 6) Is PG insurance a thing in the US? If so, please send links! This has been discussed in the past but I don't think anyone ever had an example of this being in practice.

PG's are a part of small business lending, SBA and conventional. There is some wiggle room conventionally with deals that have low loan to values, strong/consistent cash flow, etc. But if the PG is an obstacle, these types of loans are likely going to be an issue. There are means of doing loans and acquisitions without a PG, but they traditionally mean you don't have full control of the business since you have to have significant equity, lenders with more restrictions, etc. If you want to minimize your PG risk, focus on industries where there is high collateral coverage. At least in a default situation, you could sell the assets and minimize your exposure. Also focus on smaller, manageable companies where you can cover the shortfall (i.e. spousal income or personal assets) outside of the business. You can always do more acquisitions to get to your desired EBITDA over time.

Reply by a professional
from University of Michigan in Dallas, TX, USA

1. No
2. It's a blanket guarantee so all assets owned by you personally. This would include a revocable trust, An irrevocable trust is different, but courts have routinely found that there's no functional difference between the trustee of a revocable trust and the actual individual.
3. Your spouse will generally be required to sign the PG. There's really very few exceptions to this, the only being that you have so many personal assets that the loan is fully collateralized with your personal assets, but that's theoretical. I've never seen that done on an SBA loan.
4. Lender will take a 2nd in any investment property and your primary residence (in that order) up to the amount of the loan. But it's at the time the loan closes. Generally they'll only take a second if there's at least 25% equity though, and a HELOC counts as a loan even if undrawn. So if you have 40% equity but have a 20% undrawn HELOC, generally banks won't take a 2nd. Do with that what you will. And no, it won't include after-acquired real estate generally.
5. None that come to mind.
6. Not that I've seen.

In summary, there are a few levers to be pulled, but not many. Your attention and resources are probably better spent on finding a good deal that unique ways to limit the scope of a PG, otherwise an SBA loan may not be for you!

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