When you get any business loan, the lender wants assurance that you will pay the loan back. There are several ways for a lender to protect itself, but two of the most common are for the lender to require collateral and a personal guarantee. A personal guarantee is a legal contract between a lender and business owners or other individuals to guarantee loan repayment. These guarantors agree that a lender has the right to pursue loan repayment directly from their personal net worth if the loan should go in default.
With an SBA 504 Loan, the equipment or real estate being purchased is used as collateral on the loan. However, even with this collateral, the SBA requires personal guarantors. There are several reasons for this.
All SBA Loans Require Personal Guarantees
First, understand that personal guarantees are required on all SBA loans. A personal guarantee is not a sign that your business is unhealthy or risky. Even businesses with a solid performance history and an excellent credit rating will be required to sign personal guarantees.
The SBA requires unlimited full personal guaranty for any individual owning 20% or more of the operating company. If no individual owns more than 20%, then the majority owners will be required to be personal guarantors. In addition, each spouse that owns 5% or more of the business must also personally guarantee the loan if the combined ownership of both spouses is 20% or more. The SBA requires guarantors' non-owner spouses to sign only appropriate collateral documents.
This guarantee applies even if you have structured your business as a Corporation or an LLC, which normally shields you from personal liability for business debts. Remember, you are personally responsible for the loan if you've signed a personal guarantee and the business is unable to pay.
Motivation to Repay the Loan
Second, the SBA requires guarantors for the same reasons commercial lenders require them. Being personally responsible for the loan motivates owners to continue to support the business, keeping it healthy. A healthy business makes the income required to repay the loan. If the business cannot repay the loan, the personal guarantees encourage guarantors to find a way to repay the loan. The guarantors carry the risk as well as the lenders.
Lastly, the personal guarantees add secondary collateral to the primary collateral (the business assets).
Community Business Finance's loan underwriters will help you through every step of the loan process, including understanding personal guarantees. Our knowledge of SBA loan programs and experience with a variety of lenders keeps the loan process on track in a timely manner. Our attention to detail is why we have a proven history of faster approvals and faster loan turnarounds.
To get started with a 504 Loan, fill out a short online form and a loan expert will contact you.
You can also contact our offices directly:
In Texas call Bill Ebersole at 713-457-1650, ext. 201, or email him at firstname.lastname@example.org.
In Louisiana, call Jeanne Bergeron at 1-800-462-1017 or email her at email@example.com.