Offload Personal Guarantee

March 07, 2023

by a searcher in New York, NY, USA

Let's say two people are investing in a business and using an SBA loan. I understand there is a requirement that equity owners with more than 20% must give a personal guarantee.

Is there anyway to have it so that one equity investor can elect to take the entire personal guarantee themselves and absolve another shareholder that has more than 20% of equity of their personal guarantee?

Can this be written into the SBA docs or is there some side agreement that is enforceable in bankruptcy?

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Reply by a lender
in United States

If the ask is "are SBA loan personally guaranteed," the answer is yes per the SBA SOP. Depending on the lender credit guidelines and interpretation of the SBA SOP, which we all know most of often is "gray" and not black or white, not all proposed business owners are required to provide a personal guarantee. I have witnessed business acquisition loans fund with the majority owner operator providing a full PG, and another owner subject to bank credit approval offer a limited PG, perhaps over a short time frame such as 2-3yrs to ensure the new ownership fairing well. It is important to disclose to the limited PG that the release of limited PG more than likely subject to review of the business financials. On the other hand, I have seen bank lenders require a full PG on a proposed 5% owner based again on that specific bank credit decision comfort level. ***SBA change of business ownership credit guidelines varying from bank to bank to nonbank lender with no rhyme or reason from the credit decision makers is like trying to herd cats with a unicycle - it's a chaotic and unpredictable experience that leaves you scratching your head in confusion.

Reply by a lender
from California State University, Sacramento in Seattle, WA, USA

The sba will require that all ownership entities be tested for (drilling down to) the individual ownership percentages. Any individual owner at 20% plus will br required to gty. Also any agreements in writing that infer greater ownership post close to any individual owner that would put them about the 20% level could infer greater economic ownership and might trigger the gty. If investors have common and preferred ownership that infers/confers an economic benefit of great than 20% might also trigger a gty.

I’m happy to talk further. DM for a more nuanced conversation. Also DM
for links to register tor our weekly office hours where Heather Endresen and I get into these types of details.

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