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NGExpert financial copywriter
The U.S. Small Business Administration (SBA) guarantees their loans to make it easier for small businesses to qualify for the loans.
This guarantee makes lending to small businesses more attractive for lending partners because the federal government promises to pay back most of the loan if the borrower can’t. Some SBA loans also require a personal guarantee from the borrower, which serves instead of collateral if the borrower can’t repay the loan.
Find out how SBA loan guarantees work and alternatives to traditional SBA loans here.
Page written by Kat Cox. Last reviewed on August 12, 2024. Next review due October 1, 2025.
A loan guarantee is an assumption of debt by a third party if a borrower defaults on a loan. Put simply, when a third party guarantees a loan, they promise to pay the unpaid balance (or most of it) to the lender if the borrower can’t repay it themselves. These guarantees help reduce the risk for the lender, which can make it easier for them to lend to people or businesses that may be less creditworthy due to low credit scores or lack of credit history.
A loan guarantee serves instead of collateral as a way for the lending institution to know they’ll be able to get some form of repayment on their loan. The biggest difference between a loan guarantee and collateral is that collateral is a specific asset, like a piece of property, equipment or even the business itself. A guarantee is less specific and just states that a person or entity promises to repay the loan if the borrower defaults. This may include seizing the borrower’s assets (like their house, car, bank accounts or investments) or receiving a payment amount from another entity.
The SBA partially guarantees loans administered by their approved partners, usually banks. This means that the U.S. government acts as the third party that agrees to pay most of the loan’s remaining balance if a loan recipient can’t repay the funding. The SBA guarantee value changes depending on the size of the loan. For loans $150,000 or less, they’ll guarantee 85% of the value of the loan. For any loan larger than that, they’ll guarantee 75% of the loan.
Because SBA loans are only partially guaranteed, most of the SBA loan programs also require other types of loan guarantees from either the borrower or other parties. In most cases, SBA loans require a personal guarantee from at least one owner. You can generally expect that any stakeholder, owner or partner who has at least 20% ownership of the business will be asked to provide a personal guarantee of some sort to secure an SBA loan.
SBA loans are administered by SBA-approved lenders, such as banks, credit unions or community partners, all of which may have their own rules regarding guarantees or collateral. It all depends on the SBA loan program, the amount of money the borrower is requesting and who their lender is.
If you have a pretty strong application for your SBA loan, for instance, you have great credit scores, a relatively long credit history and strong annual revenue, you may be able to negotiate the terms of the personal guarantee somewhat.
Also called an unconditional guarantee, this type of personal guarantee allows the lender to recover the full outstanding balance of a loan from the borrower. This is stating to the lender that if your business doesn’t succeed and can’t repay the loan, you’re willing to give up everything you have financially – including your home, your car, any money you may have in the bank, and even your spouse’s money – to cover the loan cost.
In most cases, SBA loans require at least one owner or stakeholder to sign an unlimited personal guarantee on their loan. However, lenders may ask that other individuals involved in the company’s ownership or who have an important say in the business’s operations sign a personal guarantee as well. They may ask this even of owners who don’t have a 20% stake in the business. This may be an unlimited or limited guarantee.
SBA Form 148 is the form you’ll need to sign to complete an unlimited personal guarantee, which you can submit with your SBA loan application.
Limited personal guarantees give the borrower a little bit more protection over their personal assets. This kind of guarantee sets forth a limited dollar amount or value that the lender can collect from the signer if the business defaults on their loan payments.
Owners with a 20% stake in a business applying for an SBA loan can expect to be asked to sign at least a limited personal guarantee. However, if the lender determines that an owner with less equity in the business has an important role in the operations of the business, they may ask that they sign a personal guarantee, as well. Again, it all depends on the type of loan you’re applying for, how much you’re asking for, your lender and your business’s qualifications.
Beyond a personal guarantee, SBA loans also require that owners put in at least 10% of their own money to fund a new business or when they buy an existing business. Depending on your lender, you may be required to inject this 10% regardless of whether the business is new or not.
While they require that each owner put in at least 10% of the business equity through their means, the SBA prefers that each owner achieve at least 25% equity of the total cost of the project. This gives them a better idea of how invested each owner truly is in the project.
The amount of money or assets of value you need to have to sign the personal guarantee depends on the size of your loan. This is called adequate loan security and means that you have enough assets or money to cover your portion of the guarantee if the loan defaults.
Because the SBA guarantees a portion of the loan (usually 75-85%), any owner’s adequate loan security amount will typically be less than for a traditional loan. But again, there’s a big difference between guaranteeing an SBA 7(a) loan for $350,000 vs a loan for $5 million.
While SBA loan interest rates are capped by the SBA, the private lenders the SBA works with can still charge a higher interest rate on SBA loans than they can on other business loans. You can negotiate the rate with the lender based on your qualifications – if you have a really strong application, you may be able to get a lower interest rate.
Also, the SBA charges a fee for their guarantee as a percentage of the loan amount, depending on the length of the loan. It’s important to go over all the terms and conditions of your loan with your lender so you understand them before you take on the loan. If you want to figure out what fee you will be charge, try our calculator today.
One of the reasons that SBA loans are so popular is that the government guarantee makes it possible for lenders to give longer-term financing to small businesses. This means that businesses can get loans for anywhere from 10 to 25 years under the SBA loan programs, making it much easier to meet minimum monthly payments as they’re spread out over longer periods.
The SBA requires that all small businesses meet certain requirements to be eligible for an SBA loan, and thus the SBA loan guarantee. This means the business:
What does the SBA mean by a “small business”? Usually, they require that your business:
These calculations include all affiliates associated with your business as well. For the most part, 99% of U.S. businesses qualify as “small” under the SBA guidelines, so there’s a good chance your business meets this bar.
If you don’t qualify for an SBA loan for whatever reason, there are several things you can do.
Look for other types of financing. While being unable to qualify for an SBA loan may mean you’re also probably not a good candidate for a traditional business loan, there are many, many other types of financing available to small businesses.
Finding an alternative express business loan can help you get funding for your business, even if you don’t qualify for a traditional loan or an SBA loan. There are quite a few online lenders and alternative lenders who are willing to loan money to startups and other small businesses that need money fast.
However, it’s important to recognize that if a lender is willing to put aside risk factors like credit score or time in business, they will probably charge more for the loan, usually by having shorter repayment terms and higher interest rates. This can make the loan prohibitively expensive for many businesses. Make sure you can afford a loan before you sign for it, even if you need the money fast.
Other ways to find financing include business credit cards, lines of credit or even group financing through friends and family.
Sign up online to get started finding the right funding source for your small business. Whether it’s an SBA loan program, alternative financing or a traditional business loan, we can help you find the best option for your needs.
Simply answer a few questions and we’ll get you started on the road to small business financing.
Written by
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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