Most small businesses will require funding, especially during the start-up stage. Whilst some small businesses will have access to wealthy entrepreneurs and investors, others will require an SBA loan.
Partially guaranteed by the US Small Business Administration, an SBA loan refers to a small business loan that is administered by a lender, in most cases, this will be a bank.
Essentially, rather than lending the money directly to the business owners, they provide guidance for the lenders to follow. By making it easier for small businesses to access capital, owners will not experience as many difficulties when applying for a loan.
If you are currently looking into SBA loans, you may be wondering who is liable for the debt and whether a personal guarantee is required. We have provided you with all of the answers in our guide below.
Are You Personally Liable For An SBA Loan?
When you apply for an SBA loan, you become personally liable for the debt. This means that if your business defaults on the repayment within the time specified, they may demand for the repayments to be made by you personally.
In some cases, the lender may pursue some of your personal assets that equate to the amount that you owe them.
What Is A Personal Guarantee?
A personal guarantee is a legal document that you sign as the recipient of a loan. It confirms that you will be personally responsible for repaying any debt that your business has accumulated if the business itself defaults on the repayments.
You may need to pledge assets that the lender can claim as collateral if you aren’t able to make the repayments yourself. Assets may include your savings, your home, or any vehicles that you own.
A personal guarantee essentially acts as a safety net for the lender because it gives the borrower the responsibility of covering their debt.
There are different types of personal guarantees and the type that you sign can differ between lenders. The guarantee should also state what personal assets are going to be at risk if repayments are not made in time.
Although signing a personal guarantee can put your assets at risk, doing so can help to strengthen your application for a loan and this may benefit those who do not have a credit history.
What Are The Different Types Of Personal Guarantees?
There are two different types of personal guarantees; a limited guarantee and an unlimited guarantee. You will be asked to sign one of these by the lender. It is important to have an understanding of how each type differs.
Limited Personal Guarantee
A limited guarantee is designed for businesses where there is more than one owner making the guarantee. Should the loan go into default, each owner is responsible for repaying a certain percentage of the total amount that is outstanding. When it comes to personal assets, the value of the collateral that the lender claims from each owner will be agreed upon.
Unlimited Personal Guarantee
An unlimited personal guarantee is signed by business owners who own 20% or more of the business. Essentially, there is one principal guarantor that is going to be responsible for repaying the full amount of the loan. An unlimited personal guarantee does not offer you any protection if your business does not take off as you’d imagined it would.
Is A Personal Guarantee Required For An SBA Loan?
As stated previously, SBA loans are actually administered by lenders and the guidelines and requirements can differ depending on the bank or financial institution. Some lenders will be quite strict and will not offer a loan to a small business without having the assurance of a guarantee. Other lenders will be more lenient.
The SBA does actually offer a loan guarantee. If the borrower fails to make the repayments, the lender can claim between 50 and 85 percent of the remaining loan amount directly from the SBA. The borrower is still responsible for the amount that remains, however, it reduces the risk for the lender and because of this, there is a higher chance of them approving the loan.
Whilst the SBA offers its own guarantee, a guarantee still needs to be obtained by the lending institution. As the borrower, you must make sure that you fit the criteria of SBA and lending guidelines in order to be considered for the loan.
What Are The Benefits Of A Personal Guarantee?
Now you may be curious as to whether a personal guarantee offers any benefits. Whilst a personal guarantee increases your financial responsibility in regards to the repayments, as briefly mentioned, it is going to increase your chances of being approved for the loan.
Moreover, a personal guarantee may result in improved loan conditions. Because you are giving them more security, in return, the lending institution may reduce the interest rate on your repayments. They may also allow you to make the repayments over a longer period of time.
Are There Any Risks Associated With Personal Guarantees?
If your business is not as successful as you thought it would be you are going to be faced with the repercussions. Not only will you be left with the responsibility of making the repayments are pledging assets, but your credit score may also be affected.
It is important to make sure that you pay close attention when reading through the conditions of your personal guarantee so that you are fully aware of your obligations and responsibilities.
Can A Personal Guarantee Affect Your Finances?
Signing a personal guarantee shouldn’t have a negative impact on your finances if the repayments are made on time. Of course, if this is not going to be the case if your business starts to fall behind on the loan payments because you will personally become financially liable.
Ultimately, the borrower is personally liable for an SBA loan, and whilst all SBA loans are guaranteed, the type of personal loan that you need to sign will differ depending on the lender.