Worried a personal guarantee business loan could put your home on the line? A personal guarantee makes you personally liable if the business can’t repay, while collateral is a specific asset pledged. Terms vary by lender and country.
This explainer sits within the site’s wider business finance coverage.
| Item | Value |
|---|---|
| Ownership stake that generally triggers a guarantee on SBA loans | 20 percent or more |
| Hazard insurance threshold on SBA 7(a) loans | Loans greater than $500,000 |
| Guarantee period for a seller keeping under 20% in a partial sale | 2 years |
| Minimum historical debt service coverage ratio the SBA requires | 1.15x |
| Real estate equity that must be pledged by a 20%+ owner | 25%+ equity |
These figures come from the U.S. rule text at Cornell LII and a July 2025 lender fact sheet. They can change, so check the source before you rely on them.
What is a personal guarantee on a business loan?
A personal guarantee is a written promise by an individual, usually an owner, to answer for a business debt if the company does not pay. It sits alongside the loan rather than replacing it. Lenders use it because it gives them a second route to repayment beyond the business’s own cash flow.
Guarantees come in several forms:
- Full guarantee: the guarantor is answerable for the whole balance owed.
- Limited guarantee: the promise is capped, for example by an amount, a share or a time period.
- Corporate guarantee: a company, rather than a person, gives the promise.
The U.S. Small Business Administration (SBA) rule at 13 CFR 120.160 refers to both “full or limited guarantees”, which shows the distinction is built into real lending rules. What a guarantee allows a lender to do after a default depends on the signed agreement and on local law, so it differs by provider and country.
How collateral differs from a guarantee
Collateral is a specific asset pledged to secure a loan, such as equipment, inventory or property. A guarantee is a promise from a person, while collateral is a claim on property. Many business loans use both.
The two ideas answer different questions:
- Who is promising? A guarantee names an individual or entity who stands behind the debt.
- What is pledged? Collateral names the asset the lender can claim if the loan goes unpaid.
- What happens in a shortfall? If the asset is worth less than the debt, the guarantee may be the lender’s route to the remainder, depending on the agreement.
In SBA lending, a July 2025 CVBBA fact sheet says SBA must take collateral when available. It adds that each lender can decide whether to make a loan with a collateral shortfall.
The same fact sheet says that if a 20%+ owner owns any real estate with 25%+ equity, that equity must be pledged toward the loan. This continues until the loan is fully secured or all available collateral has been pledged, whichever comes first.
The rule text in 13 CFR 120.160 also says SBA may require professional appraisals of the applicant’s and principals’ assets. It requires hazard insurance, on all collateral, for 7(a) loans greater than $500,000 and for 504 projects greater than $500,000.
Who has to sign: the SBA 20 percent rule
For SBA-backed loans, 13 CFR 120.160 says holders of at least a 20 percent ownership interest generally must guarantee the loan. The CFR page lists its latest amendment as April 10, 2023, so the wording above reflects that page as of that date.
The same section lets SBA, or a lender using delegated authority, require other appropriate individuals or entities to give full or limited guarantees. That can apply without regard to the percentage of their ownership interests, if any. The CVBBA sheet summarises the main rule as full unlimited guaranty from all shareholders with 20%.
Private lenders and lenders outside the United States set their own rules. A small business may be asked to provide a guarantee from an owner with a much smaller stake, or from no one, depending on the lender, the loan type and the country.
Ownership changes and the 2025 SBA procedure update
Buying or selling a business changes who must guarantee. According to a May 6, 2025 client alert from the law firm Whiteford, SBA issued SOP 50 10 8, which takes effect on June 1, 2025 and applies to all SBA loan applications submitted on or after that date.
As that alert describes it, the guarantee rules differ by deal type:
- Partial change of ownership: all equity holders must provide personal guarantees of the SBA loan for at least two years, whatever the size of their stake.
- Complete change of ownership: the SOP does not require personal guarantees from equity investors with less than 20 percent ownership.
- Seller who keeps equity: the seller is treated as retaining ownership and must personally guarantee the loan for two years.
The CVBBA fact sheet, updated July 2025, repeats the period for a partial sale. It says a selling owner who remains an owner with less than 20% post-sale must provide a guaranty for the full loan amount for 2 years.
An earlier SBA notice, Notice 5000-848663, said SOP 50 10 7.1 would become effective November 15, 2023. It states SBA’s intention that in a complete change of ownership, a seller with no remaining ownership is not required to provide a guaranty.
That notice also added a substitution option. SBA allowed third-party individuals or entities to assume the liability of a personal or corporate guaranty, and the substitute guarantor must have a similar or greater value. Later procedure updates may change this, so a reader would need to confirm it with the lender.
How lenders weigh a guarantee alongside cash flow and credit
A guarantee is rarely the first thing a lender looks at. Repayment ability usually starts with the business’s own numbers, often summarised in the debt service coverage ratio. The CVBBA fact sheet says SBA requires a historical ratio of at least 1.15x in the most recent full year, and that most lenders want to see more, generally between 1.25x and 1.50x.
Credit history plays a part too. The same July 2025 sheet says SBA has no minimum credit score requirement, but lenders do review personal credit history to assess personal character. A separate business credit score measures the company rather than the owner, and the two can both come up.
The plain risks of a guarantee are worth stating clearly:
- The guarantor, not just the business, can be pursued for the debt if the business defaults.
- A guarantee given by several owners may let a lender seek payment from any of them, depending on the wording.
- Pledged collateral may be lost in a default, and the guarantee may still apply to any remaining balance.
The Whiteford alert itself says its rules are evolving and subject to lender and SBA interpretation. It advises confirming a deal structure with an SBA lender and legal counsel.
Frequently asked questions
Is a personal guarantee the same as collateral?
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No. A guarantee is a promise from a person or entity to stand behind the debt, while collateral is a specific asset pledged to secure it. A loan can have one, both or neither, depending on the lender.
Does every owner have to guarantee an SBA loan?
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Not necessarily. As of the amendment dated April 10, 2023 on the CFR page, 13 CFR 120.160 says owners above a set stake generally must guarantee, and others may be asked for full or limited guarantees. That stake is 20 percent, and partial sales are stricter, per the Whiteford alert dated May 6, 2025.
Can someone else take over a guarantee?
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The earlier SBA notice, which took effect on November 15, 2023, said third-party individuals or entities may assume a guaranty’s liability. The substitute guarantor must have a similar or greater value. Check the current SBA procedure and the lender’s own terms.
Does the SBA set a minimum credit score?
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According to the July 2025 CVBBA fact sheet, SBA does not have a minimum credit score requirement. Lenders do review personal credit history to assess personal character, and each lender sets its own approach.
This article is for general information and education only and is not financial, investment, tax or legal advice.
