Personal guarantees on business loans: what you sign and what you risk

On this page

• A guarantee is your own promise to pay
• SBA rules on who must sign
• The SBA guaranty protects the lender, not you
• Limited guarantees cap your exposure
• Federal credit law limits who a lender may ask
• A personal guarantee is a bad idea when you cannot cover it

A guarantee is your own promise to pay

A personal guaranteepersonal guaranteeYour promise to repay the loan yourself if the business cannot. is a separate contract. You promise to pay the company's loan if the company does not. Limited liability protects owners from a company's debts, but it does not cancel a guarantee you sign yourself.

SBA Form 148, the Unconditional Guarantee, shows what that promise can look like.

• You guarantee payment of all amounts owing under the note, and the guarantee lasts until the note is paid in full (para. 1).
• The lender need not seek payment from the borrower, other guarantors or collateral before it demands payment from you (paras. 1 and 6).
• You promise to pay the lender's enforcement costs, including attorney's fees (para. 9.A).
• Every guarantor is jointly and severally liable, so the lender can ask any one of you for the whole balance (para. 9.D).

A guarantee is not collateralcollateralProperty a lender can take and sell if a loan is not repaid. . It is a promise to pay, while collateral is specific property the lender can take. Lenders often ask for both. Our guide to collateral covers the second.

SBA rules on who must sign

On SBA loans, the guarantee rules turn on ownership (SOP 50 10 8.1, Sec. A, Ch. 5, Para. A, p. 93).

• Each individual who owns 20% or more of the applicant, directly or indirectly, must give an unlimited full guaranty.
• If no one reaches that threshold, at least one owner must provide a full unconditional guaranty.
• A spouse with a smaller stake must also guarantee in full when the spouses and their minor children together hold 20% or more.
• Trusts that together hold 20% or more must each guarantee in full, and the trustor must also guarantee personally.
• The lender may require more guarantees from people with a small or no stake who are critical to the business.
• Lowering your stake below the threshold does not help if the rule applied to you in the six months before the application. Complete divestiture is the exception.

Outside SBA lending, each lender sets its own rules.

The SBA guaranty protects the lender, not you

Suppose a business borrows $250,000 on a 7(a) loan and defaults after the balance has fallen to $180,000. The lender sells collateral for $60,000. That leaves $120,000, plus interest and enforcement costs.

SBA's guaranty is 85% on loans of $150,000 or less and 75% on larger loans, so it is 75% on this loan. That percentage describes the lender's protection. It does not cap your debt. Form 148 says your liability continues even if SBA pays the lender, and that SBA is not a co-guarantor (para. 9.B). You can still owe the full $120,000 and the costs.

SBA Form 1919 lists what can follow a default. SBA may report the debt to credit bureaus and hire a collection agency. It may offset your tax refund or other federal payments and refer the debt for litigation. It may also foreclose on collateral.

Limited guarantees cap your exposure

SBA Form 148L, the Unconditional Limited Guarantee, lets the lender choose one way to cap your liability (para. 4). The options are:

• Balance reduction. The guarantee ends when the total owed falls below a set dollar amount, if the note is not in default.
• Principal reduction. The same test, measured on principal alone.
• Maximum liability. A fixed dollar cap.
• Percentage. A set percent of what is owed when demand is first made, plus the same percent of interest and costs after demand.
• Time. The guarantee ends after a set number of years, unless the borrower is then in default.
• Collateral or recourse. You owe only what the lender gets from collateral you pledged.
• Community property or spousal interest. You owe only that interest in pledged collateral.

A percentage cap shows the effect. At 25%, a demand made when $160,000 is owing caps you at $40,000, plus 25% of interest and costs charged afterward.

On SBA loans, owners of 20% or more must give unlimited guarantees. Limited forms mostly serve people below that line, or loans where the lender chooses one (SOP, Sec. A, Ch. 5, Para. A.1). Ask any lender for a cap before you sign a commitment. The answer may be no.

Federal credit law limits who a lender may ask

Regulation B implements the Equal Credit Opportunity Act. It sets limits on guarantee requests.

• A lender may require the personal guarantee of a business's partners, directors and officers. It may also require guarantees from shareholders of a closely held corporation. The reason must be that person's relationship with the business. It cannot be a prohibited basis such as sex or marital status (CFPB, Official Interpretation, 7(d)(6)).
• A lender may not require your spouse to sign a credit instrument if you qualify on your own. The test is the lender's own standards (12 CFR 1002.7(d)(1)).
• A lender may ask for a cosigner or guarantor, but it may not require that the person be your spouse (1002.7(d)(5)).

On SBA loans, a non-owner spouse must sign the appropriate collateral documents, though not the personal financial statement. That spouse's guaranty on jointly held collateral is limited to the spouse's interest in it (SOP, Sec. A, Ch. 5, Para. A.2.b).

A personal guarantee is a bad idea when you cannot cover it

Do not sign a guarantee you could not pay. Add up your liquid assets and home equity outside the business. Compare that total with the loan. If the guarantee is larger than you could cover without selling your home, ask for a cap or a smaller loan.

Be most careful when the sales pitch and the contract differ. The FTC has alleged that merchant cash advance providers misrepresented whether owners had to provide collateral and personal guarantees. Its advice is to ask whether the deal requires a personal guarantee and what happens if a payment is missed. Insist on written answers.

Read the waiver paragraphs too. Form 148 has you waive notice of default and the right to require a valuation of collateral before or after a sale (para. 6). Lender forms can differ from Form 148, so have an attorney read the guarantee you will actually sign.