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Release From Your Personal Guarantee On An SBA Loan
|Last Updated on: 10th September 2023, 03:42 am
Getting Released From Your Personal Guarantee On An SBA Loan
When small business owners take out a loan from the U.S. Small Business Administration (SBA), they are almost always required to provide a personal guarantee. This makes the borrower personally responsible for repaying the debt if the business defaults.
While this guarantee gives the SBA recourse, it can have devastating consequences for entrepreneurs if the business struggles. The SBA has the power to seize personal assets like houses, cars, and savings accounts to satisfy the guarantor’s obligation.
So for owners who want to move on after closing or selling their business, getting released from the SBA loan guarantee is crucial. Here is what you need to know about the SBA personal guarantee release process.
SBA Loan Personal Guarantees
For most SBA loans, including 7(a), 504, and microloans, the agency requires personal guarantees from owners with 20% or greater ownership stake in the business. This applies to sole proprietors and general partners as well.
By signing the guarantee agreement, these owners pledge their personal assets as collateral if the business defaults. The SBA can pursue them legally for loan repayment.
Guarantors remain obligated until the loan is paid in full or they receive an official release from the SBA. This release removes them from personal liability.
When a Guarantor Can Be Released
According to SBA policy, loan guarantors may only be released in limited circumstances, such as:
- The loan is fully repaid
- The business or guarantor files bankruptcy
- A guarantor dies
- A substitute guarantor is provided
The SBA does have discretion to release a guarantee if continuing it would cause undue hardship. However, this is rarely granted.
Getting Released When Selling the Business
One of the most common situations where owners seek release from their SBA guarantee is when selling the business. However, the SBA does not automatically release guarantors when ownership transfers.
To get released, the seller must either pay off the SBA loan in full with sale proceeds or find a suitable replacement guarantor. This is often the new business owner.
The SBA will analyze the new owner’s financial strength to determine if they can assume responsibility for the debt. Strong personal credit and assets are required.
How to Request a Guarantee Release
To formally request release from your SBA loan guarantee, follow these steps:
- Contact your SBA loan servicing office and inform them of your intent to request release from your personal guarantee.
- Draft a letter with details on why you are seeking release, such as pending business sale or bankruptcy.
- Include supporting documents like sales contracts, financial statements, or bankruptcy filings.
- If proposing a substitute guarantor, provide their personal financial statements.
- Submit the request letter and documents to your SBA loan servicing office for review.
- Be responsive to any additional questions or requests from the SBA.
It can take 30-60 days to get a decision from the SBA on a guarantee release request. The more detail you provide upfront, the faster the agency can make a determination.
Release Request Tips
To boost chances of getting approved for release of your SBA loan guarantee, keep these tips in mind:
- Provide evidence the loan will be fully repaid, such as a pending business sale.
- Show the business has significant equity that offsets remaining loan balance.
- Propose substitute guarantors with strong personal credit and net worth.
- Remain current on your SBA loan payments.
- Explain hardships that prevent you from guaranteeing the debt.
Presenting a clear case that the SBA’s risk is low and their interests are protected will strengthen your request.
Alternatives to Guarantee Release
If your request for release from the SBA guarantee is denied, there are still some options to mitigate your liability:
- Indemnification agreement – The new business owner formally agrees to take over payments.
- Put loan into deferment – Suspend payments if struggling to make them.
- Sell collateral assets – Use proceeds to pay down the loan balance.
- Restructure payments – Request smaller monthly payments if needed.
While not ideal, defaulting on the loan and allowing the SBA to seize business assets could also limit exposure of personal assets.
Key Guarantee Release Considerations
As you navigate the SBA personal guarantee release process, be aware of the following:
- Hire an attorney experienced with SBA lending for guidance.
- Provide extensive financial details on any proposed substitute guarantors.
- Be prepared to pay loan servicing and release fees charged by the SBA.
- Closing business sales contingent on guarantee release is very risky.
- Even after release, you remain responsible for loan fraud or misrepresentations.
Understanding the complexities involved will help you develop the strongest case possible to get approved for release.
Life After Guarantee Release
Getting cleared of your SBA personal loan guarantee can provide enormous relief and freedom. You can move on personally and professionally without the debt burden hanging over you.</p
Release From Your Personal Guarantee On An SBA Loan
When seeking SBA financing, owners are almost always required to provide a personal guarantee. This pledge makes the borrower individually responsible for repaying the debt if the business defaults. Trying to remove a personal guarantee from an SBA loan after closing is extremely difficult, but some limited options exist.
Why Personal Guarantees Are Required
The SBA mandates personal guarantees on 7(a) and 504 loans to reduce risk. This ensures the agency can pursue owners’ personal assets like houses, cars, or investment accounts if the company misses payments. Guarantees provide accountability.
For lenders, guarantees also improve the chances of repayment. The SBA guarantees large portions of 7(a) and 504 loans to banks and CDCs. So lenders want individual liability to help offset losses if they must tap into the SBA’s guarantee.
Minimum Guarantee Requirements
For 7(a) loans up to $350,000, personal guarantees from company owners with at least 20% ownership are required.
For larger 7(a) loans, guarantees of owners with at least 20% ownership are needed, but the SBA also requires collateral business assets to cover at least 50% of the loan amount.
On 504 loans, personal guarantees are required from any 20%+ owners. 100% of a 504 loan must be collateralized by business assets.
Refusal Options
Technically, an owner asked to guarantee an SBA loan can refuse. But refusal almost always results in denial of the loan application. Lenders immediately see refusals as red flags.
Some lenders may consider accepting another owner’s fuller personal guarantee in lieu of the refusing owner’s reduced guarantee. But overall, refusals are deal breakers.
After Closing Attempts
After an SBA loan closes, removing or changing an existing personal guarantee is exponentially harder, if not impossible. The SBA does not allow lenders to simply release borrowers from guarantees due to perceived hardship or inconvenience.
Guarantors can request a compromise or adjustment of the guarantee terms only if they can prove actual legal deficiencies in how the guarantee was structured or disclosed by the lender at closing.
Sale of Ownership Interest
One potential avenue for exiting a personal guarantee on an ongoing SBA loan is selling your ownership stake.
If an owner holding a guarantee sells their equity to another owner who assumes the guarantee obligations, the departing owner can seek release.
This also requires lender approval and a signed assumption agreement from the new owner.
Addition of New Guarantor
Another option may be proposing a new owner-guarantor to replace you. As long as the new guarantor is found suitable by the lender, they can approve removing your guarantee in favor of the new guarantor’s pledge.
But the original guarantee holder still has bargaining power in this scenario and can block changes.
Loan Payoff
Of course, the cleanest way to remove a personal guarantee is simply repaying the SBA loan in full. This permanently eliminates all guarantee obligations and liability risks for guarantors.
If refinancing the balance to a new loan not requiring guarantees, be certain the SBA loan is paid in full first before releasing the guarantee.
Default Scenarios
In cases where the business defaults on an SBA loan, owners with guarantees become immediately liable. Default accelerates guarantee exposures.
Avoiding personal bankruptcy may require negotiating a settlement on the guarantee, or payment plan accommodations. But the guarantee terms will be enforced.
Guarantee Exemptions
In extremely rare cases, SBA lenders have made exceptions to guarantees for owners contributing specialized expertise to a business but little or no capital. For example, a renowned research scientist involved in a start-up.
But lenders can still require another owner to provide expanded guarantees despite the one waiver.
Seeking Compromise
If needing release from an SBA loan personal guarantee, approach lenders with tact and reasonable proposals. Highlight benefits like addition of a new guarantor or higher collateral coverage.
Remain cooperative, flexible and open to compromise. Work diligently on improving the loan’s health and security first. This builds goodwill with lenders before requesting changes on a sensitive issue like guarantees.
With care and patience, escape from guarantee liability may be negotiated successfully in limited situations.
Key Takeaway
While extremely challenging, a few potential pathways exist to remove personal guarantees from SBA loans after the fact. But exceptions will be rare. The best approach is counselling owners on guarantee commitments before signing an SBA loan.
Once guarantees are given, owners must be prepared to live with that responsibility until loans are fully repaid.