Are shareholders liable for a default on an SBA loan?

If you are an investor in a company funded by a Small Business Administration (“SBA”) loan, then you may wondering whether you are liable for the company debt should the business fail. The Borrower is principally responsible for repayment of the underlying promissory note associated with the SBA loan, but what about shareholders and members (in the case of a limited liability company) — are they liable too? It depends.

Am I automatically responsible for the business debt if I am a shareholder?

No, shareholders who simply invested in the company are not automatically liable for the business debt of the company. This is true whether your business entity is a corporation or a limited liability company (“LLC”). A shareholder or member will not be liable, unless they sign an Unconditional Guarantee agreement for the SBA loan (SBA Form 148 in most cases). It is the guarantee agreement itself and not the fact they are a shareholder or member of the Borrower that creates the personal liability for the repayment of the SBA loan in the event of a default.

What is the magic percentage that triggers the SBA’s requirement for a personal guarantee on an SBA loan?

The SBA requires a personal guarantee from all owners with at least 20% ownership in the Borrower. This means of you are a stockholder or member in an LLC and own 20% or more of the company you will be asked to sign a personal guarantee.

What If my spouse owns 5% and I own less than 20%, will either of us still have to sign a guaranty agreement?

If a shareholder or member’s spouse owns 5% or more of the Borrower and the combined ownership interest of both spouses is 20% or more, then the spouse must also provide a full personal guarantee. This is set forth in SBA’s Standard Operating Procedures (SOP 50 10 5(J)).

What if I am a shareholder and I own 5% or less of the Borrower?

SBA Lenders may still require a guarantee from a shareholder or member’s spouse if they think it is necessary to perfect their lien on collateral pledged by a shareholder or member. In such cases, it may be that the lender will ask the spouse to sign SBA Form 148L which limits the spouses liability to their interest in specific collateral pledged by their husband or wife; this is called an Unconditional Limited Guarantee.

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