Understanding risks associated with PG in SBA loans
March 28, 2025
by a searcher in Washington, DC, USA
I'd like to understand the following:
1. I am aware the cap for SBA 7a loan is $5M (at least as of today). How do they determine how much actual loan can an individual or the potential business receive? Do I get $2M, $3M or full $5M - how is that decided? My understanding is many lenders lend on cashflow basis and not collateral - how does that play into this?
2. Say the searcher / acquired business becomes insolvent, has to declare bankruptcy. What all does the SBA come after? For example: assets under my name upto a $ value of the loan amount owed, what about future cashflow, do they come after assets you have in another country?
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA
Determining the SBA 7(a) Loan Amount The $5 million cap is the maximum amount on which the SBA will guarantee. The actual loan amount you receive isn't a simple, fixed determination. Business Plan and Projections: Lenders meticulously review the historical tax returns / cash flow and future financial projections. They assess the business's ability to generate sufficient cash flow to repay the loan. Many SBA lenders will be using historical cash flows, so if you have a business with substantial growth and an agreed purchase price above which is supported by historical figures, you want to be aware of that. Borrower's Creditworthiness: Your personal credit history and the business's creditworthiness are a box to check based on 5 C's. Lenders evaluate your past financial behavior to assess the risk of default.
Cash Flow Analysis: Lenders want to see that the business generates enough cash to cover loan payments, operating expenses, and other financial obligations. Debt service coverage ratio (DSCR) is a key metric. Lenders typically look for a DSCR of 1.25 or higher, meaning the business generates 1.25 times the cash needed to cover debt payments. Collateral (Sometimes): While cash flow is often prioritized, collateral can still play a role, especially for larger loan amounts. Lenders may require collateral to mitigate their risk, even with the SBA guarantee. This could include real estate, equipment, or other business assets. It is less common for full collateralized loans, but is still a factor that lenders consider. Industry and Business Type: Some industries are considered higher risk than others. Lenders may be more conservative with loan amounts for businesses in volatile or high-risk sectors. Lender's Internal Policies: Individual lenders have their own underwriting criteria and risk tolerances. This means that the loan amount offered can vary from lender to lender.
SBA 7(a) Loan and Bankruptcy If the business becomes insolvent and declares bankruptcy, the following scenarios can unfold: SBA Guarantee: The SBA guarantee protects the lender, not the borrower. If the business defaults, the SBA will pay the lender a portion of the outstanding loan balance, as per the guarantee agreement. Personal Guarantees: Most SBA 7(a) loans require personal guarantees from the business owners. This means that your personal assets can be at risk. Lenders can pursue your personal assets to recover the outstanding loan balance. Asset Seizure: Lenders can seize business assets that were used as collateral. If you provided personal assets as collateral, those assets can also be seized (main one being the house that is pledged if holding more than 25% value in equity). Legal Action: Lenders can pursue legal action to recover the outstanding debt. This can include wage garnishment or liens on your property. International Assets: Generally, lenders can pursue assets located in other countries if they obtain a judgment in a U.S. court and that judgment is enforceable in the foreign jurisdiction. However, enforcing judgments across international borders can be complex and expensive. The existence of international assets must be disclosed during the loan process, and it will effect the risk assessment of the loan. Future Cash Flow: While they cannot directly claim future cashflow that does not yet exist, if a payment plan is created during bankruptcy proceedings, future cashflow will be considered when determining the payment amounts. Bankruptcy Proceedings: The specific assets that are subject to seizure will depend on the type of bankruptcy filed (e.g., Chapter 7, Chapter 11, Chapter 13). Some assets may be exempt from seizure, depending on state and federal laws. Key Points: SBA loans are not risk-free for borrowers. Personal guarantees put your personal assets at risk. Lenders will aggressively pursue all available avenues to recover outstanding debt. It is very important to fully disclose all assets, domestic and international, during the loan application process.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Most SBA lenders are looking at how much debt the business qualifies from a cash flow perspective. Although the loan does not need to be fully secured by hard collateral, how comfortable certain lenders get on a transaction might be impacted by the collateral available. Not all lenders will do deals that are fully secured by goodwill business value where the business does not really have any hard collateral. So the collateral can impact the options available. Also, most lenders are looking at the owner(s) / Guarantors to have a certain amount of strength and post-closing liquidity to provide fall-back support as well as the appropriate experience to operate the business. All of this can impact at what level a lender will get comfortable to provide financing. We do pre-approvals for Borrowers all the time. We would be happy to look at your situation and provide you more specific feedback on what you might qualify for.
If the business becomes insolvent the Bank would liquidate any assets available. The Bank can then pursue the guarantors if they choose to do so. They could also go to the SBA, get paid on the guaranteed portion of the loan, write off the rest of the loan, and leave the SBA to pursue the guarantors in the future, which they rarely do. If the guarantors have outside assets that are worth pursuing, it is more likely a Bank would pursue those assets. You also have the option of filing a personal bankruptcy to wipe out the debt at any time. I would be happy to walk through this as well.
If you have additional questions you can reach me at redacted or here. Good luck.