SBA PG Specifics

November 05, 2021

by a searcher from Columbia University in New York, NY, USA

I am working to close a deal and am exploring SBA as an option. I had an SBA advisor share the below, all of which were new to me, and I am interested in the experiences of this group. Historically, I hadn't liked or looked deeply at SBA due to the full PG requirement as well as the difficulty in working with outside investors, but today was told:
- Outside investors holding less than 20% individually will not be required to PG
- PG'd assets that are held with partners are outside the scope of the PG (ie. they can look at them as coverage, but not collect against them in a downside scenario)
- IRA funds are outside the scope of PG
- In advance of coming to collect on a PG, the lender needs to report to the SBA, which can be bad for them optically as well as for their standing with the SBA
- During COVID and otherwise, SBA lenders work creatively to restructure in cases of issue, rather than coming for PGd assets

These were learnings for me, as I was under the assumption that SBA lenders come right for the throat.

I'd love to hear from any in this group who have had to undergo ups and downs with a business that had SBA debt on it, and how their experiences were.

Reply by a lender
in Yorba Linda, CA, USA

I would agree with most of this with a few clarifications: 1) Investors must be kept below 20% "economic benefit" to avoid the PG.....that means preferred returns will be taken into consideration for the total economic benefit. Preferred shareholders generally need to be held to around 13% direct ownership depending on the preferred rate 2) PG'd assets won't be collected on during a default....That's not necessarily accurate. While suing for the non-pledged personal assets of a personal guarantor might be too cost prohibitive, there are scenarios that would make it worthwhile for the lender and SBA to pursue those assets in court. Best to consult with an attorney to get a full understanding of what is at risk with a PG and 3) Collecting on the PG may look bad optically to SBA.....a liquidation plan for a defaulted SBA loan is agreed upon by SBA prior to proceeding. Again, if there is a personal guarantor with significant assets, and they are refusing to negotiate with the bank to repay the loan, there are certainly scenarios where the bank and SBA may pursue the assets in court. These are all case-by-case situations. I suggest googling "SBA Offer in Compromise" to get a more complete understanding of how things could play out in a default.

Reply by an investor
from University of Pennsylvania in New York, NY, USA

My experience when financing my transaction was that a lot of traditional banks wanted a personal guarantee as well. So it’s not just a SBA issue. One of them gave a few examples consistent with what Heather described as refusing to negotiate - business owner had significant personal assets (“million dollar boat”) and didn’t engage. It wasn’t something they really wanted to do.

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