Why is a personal guaranty needed if SBA provides a 75% guaranty to the lender?

January 15, 2026

by a lender from University of Arizona in Raleigh, NC, USA

I've gotten this question several times recently so I figured we can discuss it. Even though the SBA provides the bank with a 75% guarantee, it doesn’t mean the bank (or the SBA) is taking on all of the risk. Here’s why a personal guaranty is still required: *It shows commitment. By personally guaranteeing the loan, you’re showing both the bank and the SBA that you’re fully invested in making the business succeed. *It keeps everyone accountable. If borrowers could just walk away without any responsibility, it would create a lot of risk. The guaranty makes sure we’re all aligned. *It’s part of SBA rules. Before the SBA pays the guarantee to the bank, the lender has to show that all efforts were made to collect on the loan including the personal guaranty. So, the guaranty isn’t about expecting things to go wrong it’s about making sure you’re personally connected to the success of your business.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I get a lot of questions about the personal guarantee as well. A personal guarantee is not only required by the SBA, however, just about all traditional banks on loans sizes below usually $10 million to $15 million, and even in some cases on larger loans, have the requirement of a personal guarantee in their Loan Policies. If you are looking to do an SBA sized loan, I can pretty much guaranty you that any traditional bank that were to look at that debt would require a personal guarantee as well. In addition, even some non-bank lenders require a personal guarantee. I see many buyers hoping to avoid the personal guarantee by just doing a conventional loan, and often that is not going to be the case for them. On smaller transactions where the success and operations of the business are typically controlled by an individual or a small number of individuals, the personal guarantee provides the lender additional assurances that those owners are going to act in the best interest of the business because they have something at risk if they do not do so. It is easy with a small business for an owner to sell assets or pull cash out of a struggling business. With the guarantee there is no benefit for the owner to do that because they would end up responsible for that debt personally anyway. There is also a tremendous amount of history that shows Banks lose substantially more money on non-recourse / non-guaranteed loans then they do on recourse / guaranteed loans. If as a guarantor you have risk, you will be more cooperative in working on a solution, liquidating collateral, or helping to sell the business or real estate to maximize what you and the lender can get out of it. So that is another reason lenders want the guarantee. From the SBA perspective, even though the government is guaranteeing the loan, the government does not want to actually lose money on the loan. The SBA is also aware that default rates are much greater on non-guaranteed loans and the recoveries on bad loans are much greater with loans that are personally guaranteed. The SBA wants to be sure the owner has something at risk. That is why they require the personal guarantee. Lastly, to clarify how the SBA government guarantee works, here is an example. Say you borrow $1 million on an SBA 7A loan for a business that really has only about $200,000 in assets and the rest of the purchase is going to the goodwill value of the business. If the loan goes bad at $1 million, the SBA portion is $750,000 and the Bank portion is $250,000. Say the Bank recovers all $200,000 in assets, 75% of that money goes to reduce the SBA exposure and 25% of that money ($50,000) goes to reduce the Bank's exposure. The Bank's potential loss on the loan would go down from $250,000 to $200,000 (which also does not include any collection costs, legal costs, or lost interest). A $200,000 loss for a Bank to take is high. I know it does not seem like a lot, but the Bank has not made anywhere near $200,000 on the loan once you include staffing, closing costs, cost of bank funds, etc. A traditional lender would be unlikely to make a loan that is under-collateralized to begin with just for this reason. Even with the SBA guarantee in place, the Bank still takes on some loss risk that can hurt their capital position. They are not going to do that without being sure the owner(s) is backing the loan. I hope this all helps to clarify. If you have additional questions on personal guarantees on commercial loans or how the SBA loan program works, you can reach me here or directly at redacted

Reply by an admin
from Massachusetts Institute of Technology in Portland, OR, USA

^redacted might be able to contribute to this discussion on personal guarantees.

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