SBA personal guarantee checker: who has to sign, and whether a home must be pledged

What it checks

Three questions, each answered from SBA's lending manual.

Who has to guarantee. Everyone who owns 20% or more of the business gives an unlimited personal guarantee. The checker also applies the rules that catch people under 20%: spouses counted together, trusts counted together, and anyone who owned 20% six months before the application.

What collateral SBA requires. That depends on the size of the loan and the route it takes. SBA asks for nothing on $50,000 or less, and for a fully secured loan above $350,000.

Whether a property counts. When a larger loan is short of collateral, the lender must take the equity in the owners' real estate. A property with less than 25% equity is exempt.

Our guide to personal guarantees and collateral sets out the rules in full, with what the loan records show and what SBA's manual says happens when a loan is not repaid.

The example it opens on

The business wants to borrow $600,000. Of its 5 owners, 4 must guarantee.

• Owner 1 owns 50%, well over the line.
• Owners 2 and 3 are married to each other. Neither reaches 20%, but with 15% and 10% they pass it together, so each guarantees the whole loan.
• Owner 4 has 15% and no spouse among the owners. SBA does not require a guarantee. The lender may.
• Owner 5 holds 10% today but held 20% or more six months before the application. The obligation stays.

The loan is over $350,000, so it must be fully secured. One owner has a home worth $400,000 with $280,000 owed on it. The equity is $120,000, or 30% of the value. That is above 25%, so if the business's own assets do not cover the loan by SBA's measure, the lender must take a lien on the home. The lien may be limited to the shortfall or to 150% of the equity, which here is $180,000.

Raise what is owed on the home to $320,000 and the equity falls to 20%. SBA no longer requires the lien.

How to enter the owners

Use the shares after the loan closes. If the loan pays for someone to buy in or buy out, the shares that count are the ones after the sale.

Add up direct and indirect shares. SBA counts what a person owns through other companies in proportion. Someone who owns half of a company that owns 40% of the business holds 20%.

List a company and the people behind it. A company with 20% or more must guarantee, and so must each person whose share through it reaches 20%. Enter both. The shares will add up to more than 100%, and the checker says so without treating it as an error.

Give spouses the same family letter. Include their minor children. A child cannot guarantee, but the share counts toward the family's 20%. SBA does not lend to a business in which a minor owns 20% or more, and the checker flags that.

Trusts are counted together. If the trusts among the owners hold 20% or more between them, each one guarantees, and so does the person who set up the trust.

What an unlimited guarantee means

It covers the whole loan. A guarantor with 20% of the business is not liable for 20% of the debt. SBA's manual for loans in default says each guarantor can be asked for full payment, and tells lenders not to divide the debt among them.

It is also unconditional: a promise to pay the debt if the borrower does not. When a lender calls a loan due, its demand goes to the borrower and to every guarantor at the same time.

A limited guarantee is a different document. It is what a spouse who owns nothing signs for jointly held collateral, and what a lender may accept from someone it asks to sign by choice.

What the checker leaves out

• Your lender's own policy. SBA sets a floor. A lender may ask for guarantees from people SBA does not require, and for collateral on loans where SBA requires none.
• Whether the loan is actually fully secured. That takes a valuation of the business's fixed assets, discounted as SBA prescribes. The checker tells you when the test applies and what follows if there is a shortfall.
• Loans that buy a business. They have stricter collateral rules at every size, and a seller who keeps a stake has to guarantee for a time. See the acquisition calculator.
• Non-owner spouses. A spouse who owns none of the business signs the documents for jointly held collateral. The checker lists owners only.
• State law. What a spouse's signature is needed for, and what a creditor can reach, differ from state to state.
• Other programs. These are the rules for 7(a) loans. SBA 504 loans follow the same 20% line for guarantees but have collateral rules of their own.

This page is general information, not legal advice. It is not an offer of credit, and we are not a lender.