Small businesses seeking capital often consider the SBA (Small Business Administration) the best possible source due to the low interest rates. In addition to standard SBA loans, the SBA also offers assistance in the form of disaster loans, which small businesses faced with natural or economic troubles can use to make it through unexpected challenges. Before obtaining an SBA disaster loan, it’s important to learn whether or not you’ll have to offer a personal guarantee in the process.
Below is a quick summary of which SBA disaster loans require a personal guarantee:
- Physical Disaster Loan: Personal guarantee required
- SBA (504) Loans: Personal guarantee required.
- COVID-19 PPP (Paycheck Protection Program) Loans: No longer available
- EIDL (Economic Injury Disaster Loan): No longer available
What Is a Personal Guarantee?
Depending on your lender and the loan or financing product you’re applying for, you may be asked for a personal guarantee. Some lenders request a personal guarantee to risk-proof their investment in your business. A personal guarantee is a legally binding promise to personally pay off your remaining business debt in the event that the business can’t.
By having you agree to personally guarantee the loan, the lender can confidently lend to your business. If a business defaults on the loan or can no longer continue, then the lender can receive their payments through the business owner.
Typically, small business loans that are personally guaranteed are unsecured, meaning the business owner is not putting up any collateral (such as a business or personal asset like a building or home) in exchange for the loan. When you put up collateral for a business loan, the lender can use the proceeds to cover the remaining interest.
Generally, small business owners tend to prefer personal guarantees to collateral. Among other reasons, many small business owners simply don’t have access to the necessary collateral.
For some products, securing a loan may not be optional but required. This often varies on a case-by-case basis. Frequently, small business loans and business lines of credit require personal guarantees.
Before signing a loan agreement, be sure to ask your potential lender whether or not the loan requires a personal guarantee.
What Are the Implications of Personal Guarantees?
Personal guarantees shift the responsibility of repayment from the business to the owner. In other words, this means the business owner is personally responsible for unpaid funds if the business defaults on their financing.
Owners must leverage their personal assets to repay the loan. They may have to sell real estate and investments or use their own cash to cover the remaining balance. If they don’t have enough, they may have to declare personal bankruptcy.
This is reflected in the owner’s credit history, making it difficult for them to apply for personal credit in the future.
Are SBA Disaster Loans Personally Guaranteed?
SBA disaster loans are a unique source of capital offered by the Small Business Administration. This capital helps small businesses alleviate sudden economic challenges presented by new circumstances.
Depending on the nature of your challenge, you may apply for one of several types of SBA loans. The personal guarantee requirement can also vary based on the product type.
– Physical Disaster Loan: No Personal Guarantee Required
The SBA also offers disaster funding for businesses that suffer due to natural disasters or physical damage. These products may require a personal guarantee, depending on your business’s financial background.
– SBA (504) Loans: Personal Guarantee Required
If you’re applying for a standard SBA (504) loan, then you’ll likely have to issue a personal guarantee. Because these loans are intended for general growth or problem-solving, they don’t fall under the disaster category.
That being said, an SBA loan personal guarantee can help you access lower interest rates and longer terms.
– COVID-19 PPP Loans: No Longer Available
Funding available through the SBA’s Paycheck Protection Program does not require a personal guarantee. In fact, the program itself hinges on full loan forgiveness, assuming the business meets certain requirements.
The SBA introduced the PPP loan to help small businesses continue paying their employees, despite the difficulties imposed by the coronavirus pandemic. This funding, which is federally guaranteed, has helped small businesses through this tough time. In addition to covering payroll, this funding was also be used to cover other necessary costs, such as operating costs, interest on mortgage payments, rent, utilities, and more.
PPP loan eligibility ended on May 31, 2021.
– EIDL: No Longer Available
The Economic Injury Disaster Loan, which is another product offered by the SBA to help small businesses impacted by the coronavirus, didn’t always require a personal guarantee. For businesses receiving $200K or less, there is no personal guarantee required. However, loans over $200,000 still required collateral.
Covid-19 EIDL loan eligibility ended on January 1, 2022.
SBA Loan: Unlimited vs. Limited Personal Guarantees
Limited guarantees place a cap on the amount you’re personally liable for, whereas unlimited guarantees provide lenders with the right to seize all of your personal assets in default scenarios.
Limited guarantees feature a “maximum liability” figure, which is the cap of what the borrower is responsible for. While they may still lose some of their personal assets, they won’t lose them all.
Unlimited guarantees are much, much riskier for the borrower, even when they’re the utmost confident in their plans. It’s best to avoid unlimited personal guarantees in most scenarios.
Get Your Business The Help It Needs
When your business is working through an emergency, you need funding fast—and without a lengthy process. At National Business Capital, our Business Finance Advisors diligently work through the application with you to get you the help you need.
Learn more about our various SBA programs here!