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SBA Loan Defaults and Personal Guarantee Risk
The Small Business Administration (SBA) 7(a) loan program is a popular financing option for small business owners. However, obtaining an SBA loan requires a personal guarantee from the business owner(s) and/or other individuals who own at least 20% of the business. A personal guarantee is a legal agreement that holds the guarantor personally liable for the loan in the event that the borrower defaults. What are the consequences of defaulting on a personal guarantee?
Defaulting on an SBA 7(a) Loan
If a borrower defaults on an SBA 7(a) loan, the lender will first attempt to collect the debt from the borrower. However, if the borrower is unable to pay the debt, the lender may turn to the personal guarantors for repayment. In fact, the SBA requires lenders to pursue all available remedies against the borrower and the personal guarantors before the SBA will pay its guarantee on the loan. Once the lender demands payment from the personal guarantors, there is a 60 day period to either pay the debt in full or come to a repayment agreement with the lender. If no agreement is reached, the lender may begin legal action to collect the debt.
Consequences of Defaulting on a Personal Guarantee
If a personal guarantor defaults on an SBA 7(a) loan, there can be serious consequences. The lender may take legal action against the guarantor to collect the debt including the possibility of losing your home, having your bank accounts wiped out, having wages and social security garnished, and not being able to get another SBA loan or federally backed loan.
In some cases, personal guarantors may be able to negotiate a repayment plan with the lender to avoid legal action. However, this is not always possible, and the guarantor may still be held liable for the full amount of the debt.
SBA financing for the purchase of a business has many advantages, including a low down payment, a longer amortization period, lower monthly payments, combination with other sources of financing, and the seller receiving payment at the time of purchase. However, the personal guarantee is a major downside risk!
Advisors with expertise and experience are not only recommended, but mandatory, when purchasing a business.
Larry Goldstein
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