If you're thinking about applying for an SBA loan, you've probably wondered: Are these loans personally guaranteed? Understanding this could affect your decision and your financial security. Let’s break down what personal guarantees mean for SBA loans and what you need to know before signing on the dotted line.
What Is a Personal Guarantee?
A personal guarantee is a promise you make to repay the loan personally if your business can’t. It means the lender can come after your personal assets—like your home, car, or savings—to recover the loan amount.
For many business owners, this feels like a safety net for lenders. But it also means taking on extra financial risk yourself.
SBA Loans Almost Always Require a Personal Guarantee
For most SBA loans, personal guarantees are not optional. If you own 20% or more of the business applying for the loan, you’ll generally be asked to provide an unlimited personal guarantee.
This requirement helps lenders feel safer about giving loans to small businesses that may not have extensive credit histories or large assets.
Here’s what this looks like in practice:
- Business owners with 20%+ ownership: Must personally guarantee the loan without limits.
- Owners with less than 20%: May give a limited guarantee, sometimes capped based on ownership stake.
- Exceptions: Very small SBA microloans or loans under $50,000 might have different rules depending on the lender.
Why Does The SBA Require Personal Guarantees?
The SBA backs a large part of the loan but doesn’t cover it 100%. Here’s why personal guarantees are part of the deal:
- They reduce the lender’s risk by opening up personal assets.
- They encourage borrowers to repay responsibly since their own finances are on the line.
- They allow lenders to approve loans that might be too risky without some form of security.
Even when you put up collateral—like equipment or real estate—you’ll likely still need to sign a personal guarantee. The guarantee acts as an extra layer of protection.
Collateral vs. Personal Guarantee: What’s the Difference?
People often confuse collateral with personal guarantees, but they’re not the same.
- Collateral: Physical or financial assets pledged to secure the loan—such as business equipment, real estate, or inventory. Lenders can claim these assets if the loan defaults.
- Personal Guarantee: A legal promise by the individual to repay the loan personally, beyond just the business assets.
The SBA typically requires both when the loan amount is over $50,000. Collateral covers the loan amount, but if collateral falls short or loses value, the personal guarantee fills in the gap.
What About Different SBA Loan Types?
Not all SBA loans have the same guarantee or collateral terms.
- SBA 7(a) Loans: The most popular type. Usually require a personal guarantee from owners with 20%+ shares and collateral if the loan is over $50,000.
- SBA CDC/504 Loans: These focus on real estate and equipment and use those assets as collateral. Personal guarantees are required but may differ depending on the lender.
- Microloans: These smaller loans may or may not require collateral or personal guarantees, depending on the intermediary lender’s rules.
- Disaster Loans: Generally require personal guarantees, but collateral requirements might be relaxed.
If you want to avoid a personal guarantee, it’s tough with SBA-backed loans. Other loan types might offer unsecured options, but SBA loans almost always require them.
Photo by RDNE Stock project
Risks of Personally Guaranteeing an SBA Loan
Signing a personal guarantee is a serious decision. It means your personal wealth is on the line if your business struggles or fails to repay.
Here are some risks to keep in mind:
- Personal liability: If your business can’t pay, lenders can pursue your personal assets.
- Credit impact: Defaulting on a personally guaranteed loan can damage your personal credit score.
- Stress: The pressure to protect your personal finances can be overwhelming, especially in tough business periods.
This is why it’s important to understand your financial situation fully before applying.
How to Protect Yourself When You Sign a Personal Guarantee
If you have to sign a personal guarantee, there are a few ways to limit your risk:
- Negotiate the terms. Sometimes you can ask for a limited guarantee based on ownership percentage.
- Understand your liability scope. Know exactly what assets are at risk.
- Keep business and personal finances separate. This helps when it comes to repayment and legal clarity.
- Consider insurance. Some policies protect against business loan defaults.
- Monitor your business’s financial health to avoid surprises.
Conclusion: Expect to Personally Guarantee SBA Loans
Most SBA loans require a personal guarantee from business owners with significant ownership stakes. It’s more than just a formality—it’s a serious commitment. If you’re applying for an SBA loan, expect to sign a personal guarantee unless your loan is very small or your lender makes an exception.
Think of it as a handshake with the bank that says, "I’m in this together." Knowing this helps you prepare for the responsibility and make informed financial decisions.
Understanding personal guarantees means you’re better equipped to choose the right financing option for your business without surprises later.
If you’re unsure, talk to your lender or a financial advisor to get a clear picture of what you’re signing. It’s your personal and business future on the line.