Ways to limit personal guarantee?

searcher profile

May 27, 2024

by a searcher in Denver, CO, USA

Hi all - I will fund with an SBA loan but want to limit the amount of the loan to the amount that I'm comfortable pledging as my personal guarantee. I understand they'll have to take a lien on 2 homes that I own. However I anticipate that my acquisition will be in excess of the amount I'm comfortable with pledging as a personal guarantee. Are there banks that can fill the funding gap without personal guarantees as a second funding source to my SBA loan? If I sign up investors, I assume they don't need personal guarantees, correct? And lastly, it seems from what I've read, seller-financing usually asks for personal guarantees. Any ideas here? Am I correct in my assumptions? Thanks for all your help.

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commentor profile
Reply by an intermediary
from Creighton University in Los Angeles, CA, USA
For SBA loans, the personal guarantee requirements are quite strict. Any owner with 20% or more equity stake in the business must provide a personal guarantee for the loan. This means you would be personally liable for repaying the entire SBA loan if the business cannot, even if the loan amount exceeds the value of collateral like your homes. However, there are a few potential options to limit your personal liability:

1. Seek additional funding sources without personal guarantees: You are correct that bringing on outside investors typically does not require them to personally guarantee the loan. Their liability would be limited to their investment amount. Just make sure they are under the 20% PG benchmark.

2. Limit the SBA loan size: You can limit the SBA loan amount to only what you are comfortable personally guaranteeing based on your home equity and other personal assets. Then seek additional funding from investors or commercial loans to cover the remaining needs.

3. Seller financing may require personal guarantees as you mentioned. But you may be able to negotiate a limited guarantee capped at a certain amount you are comfortable with.

For context, I co-founded Dealwise to be the easiest and fastest way to get an SBA loan for a business acquisition. In a nutshell, we connect borrowers and SBA 7(a) lenders, functioning as an automated loan broker. You can learn more about us here [https://godealwise.com/beacon]
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Reply by a searcher
from University of Nebraska in Lincoln, NE, USA
Most investors are going to want you to have a PG. They want the additional pressure of you fulfilling the loan. Completely makes sense. You won't get a look from most if there isn't a PG in place. Exceptions will always be made for those with prior successful acquisitions and exits. But those are people with pre-existing relationships.

* That said, you can take out a HELOC, lower your home's equity to less than 20%, and 6 months later apply for an SBA. This may keep your home off the PG. They can still take your home, but it's lower in the pecking order. Offset some of the HELOC cost with a CD against the cash.

Getting a HELOC after an SBA loan won't be possible, so the HELOC serves doubly as a cash reserve if the business goes south.

* Acquiring a business with the same NAICS code as your existing business, may lower your equity injection requirement.

* 401Ks, and IRAs are protected, so any cash placed there, would not be available.

Lenders, feel free to chime in. ^redacted‌ ^redacted‌
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