What They Don't Tell You About SBA Loans: The Personal Guarantee

The dreaded "PG". We've all heard about it, but what is it? Can it be avoided? Can it be minimized? Contrary to popular belief, non-recourse lending is exceedingly rare in commercial loans, and impossible with government guaranteed lending - so you should familiarize yourself with what a personal guarantee actually entails. The basics: 1. The SBA requires an unlimited, unconditional guaranty for all principals of a company with 20% or more ownership (see Form 148), individuals and entities. 2. Also required is a guaranty from the owner's spouse, in the event any jointly owned real estate is being pledged as collateral. This PG though, is typically limited to the amount of available equity in the property (see Form 148L). More on collateral shortfalls in another post. 3. The lender may require other individuals to guarantee without regard to the percentage of their ownership interest, if any. Yes, the lender can request someone with 0% ownership to pledge a guaranty, including "Key Employees". The tricky parts: 1a. If no single individual or entity owns 20%+ of the company, at least one of the owners must provide an unlimited guaranty. Complex ownership structures and tiers designed to avoid a partner/entity guaranteeing the loan (e.g. trusts or holdcos) can render the deal ineligible. More on this later in a separate post but the lender will follow the ownership cookie crumbs down to at least one person. 2a. Each spouse must fully guarantee the loan if the combined ownership of both spouses and minor children is 20% or more. For example - you, your spouse, and your two minor children each own 5% interest in an applicant, either individually or through a holding company - you and your spouse are required to pledge an unlimited guaranty. 3a. In a diluted ownership situation, the lender can choose who they want to guarantee the loan at their discretion. For example - you have a minority owner investor that is injecting capital for your acquisition, and your personal balance sheet is thin while theirs is impressive (a parent or in-law maybe) - the SBA defers to the lender's discretion. Non-recourse lending at the SMB level is not a thing. Searchers getting creative to limit their personal liability is absolutely on the SBA's Office of Credit Risk Management's radar. Just because your lender got the deal across the finish line, doesn't mean they did it correctly. There is WAY MORE to personal guaranties than outlined here, so feel free to DM me with questions. Many searchers are confused on what a "PG" actually entails and what it means to the person signing it.