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:
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.
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.
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—but more on that later.
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, is helping small businesses through this tough time. In addition to covering payroll, this funding can also be used to cover other necessary costs, such as operating costs, interest on mortgage payments, rent, utilities, and more.
Because guarantees are utilized to ensure that the borrower repays the loan, the PPP loan—which is forgivable if businesses meet the right conditions—does not require a personal guarantee.
Qualifying for PPP loan forgiveness isn’t difficult—all you need to do is abide by the guidelines.
Generally speaking, PPP loan forgiveness depends on your use of the loan. As this funding is intended to help you continue paying employees, you must maintain payroll and pay all employees. Or, if you were forced to temporarily lay off employees due to COVID-19, you must rehire them by June 30, 2020.
At most, 25% of the loan can be used to cover non payroll-related expenses like utilities—using more could decrease the forgiven amount.
If you don’t abide by these guidelines, you may still qualify for partial forgiveness.
The Economic Injury Disaster Loan, which is another product offered by the SBA to help small businesses impacted by the coronavirus, won’t always require a personal guarantee. For businesses receiving $200K or less, there is no personal guarantee required. However, loans over $200,000 may still require collateral.
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.
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.
When your business is working through an emergency, you need funding fast—and without a lengthy process. At National, our Business Financing Advisors diligently work through the application with you to get you the help you need.
Learn more about our various SBA programs here!
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Matt Carrigan is the Content Writer at National Business Capital & Services. He loves spending every day creating content to educate business owners across every industry about business growth strategies, and how they can access the funding they need!