The SBA 504 loan is a fantastic option for businesses looking to grow. It helps businesses afford to purchase real estate, improve or replace machinery, and construct new buildings—all with less money out of pocket than most conventional bank loans require.
When processing an SBA 504 loan for our clients here at BFC, we’re often asked about “personal guarantees”, and what they mean in relation to the loan. In simple terms, a personal guarantee is a legal document that ensures the business owner has the funds necessary to repay the cost of the loan should it go into default. The “guarantor” (the one receiving the loan) agrees that a lender has the right to pursue loan repayment directly from their personal net worth if the loan goes into default.
Personal guarantees are required for any business owner who owns more than 20% of the business. If no individual owns more than 20%, then the majority owners will be required to be personal guarantors. In addition, each spouse that owns 5% or more of the business must also personally guarantee the loan if the combined ownership of both spouses is 20% or more. Fact is, all SBA loans require a personal guarantee and the 504 is no different in that regard.
Let’s remember again how the 504 is structured: The first part is a conventional loan for up to 50% of the total loan amount. The second part is an SBA loan of up to 40% of the total loan amount, facilitated by us here at BFC. The last is a 10% deposit by you, the business owner.
Lenders are eager to work with CDCs on 504 loans because their interests come first, and since they’ve only financed 50% of the total loan amount their risk is very well covered. This reduced lender risk is also why it’s likely that an SBA 504 loan will give you better financing terms than you would find anywhere else.
At BFC, we’re here to help answer any additional questions you may have about personal guarantees and would be happy to walk and talk you through the process. To learn more, call 1-800-SBA-REAL today!