SBA Personal Guarantee on Preferred Equity Investor?

by a searcher from IE Business School

4 years ago

Hi Everyone,

I'm very early in my research phase but I have a question related to the SBA personal guarantee. I understand it applies to anyone that owns > 20% of the company, but it's unclear to me whether that applies to all types of equity or only common equity.

By way of a simplified example:  Suppose the CEO/Searcher puts in $100k as common equity, an Investor puts in $100k as preferred equity (coupon doesn't matter right now but assume it comes with one), & then $800k comes from an SBA loan. The Investor is passive, or at most provides some advisory/guidance, so s/he is not actively involved in the day to day operations. Would the SBA require a personal guarantee from the Investor? I know the CEO/Searcher won't be able to avoid it but I'm prepared for that. 

Thanks for your thoughts & advice!

James

6 likes
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28 comments

searcher from University of Kentucky

Jeff touches on it, they are not required to but the bank can ask for them to based on an internal policy. I think it is worth further saying that they can ask about it, and you are free to say "no" by asking specifically why this would add value to a deal that cashflows.

3 months ago | like reply | 0 likes

intermediary from Clemson University

Because they are less than 20% they are not 'required' to sign a PG by SBA guideline, although the bank can ask or have internal policy requiring it.

4 months ago | like reply | 0 likes

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