What happens to your personal guarantee when the business fails, and how owners get out from under one.

What you signed

SBA lenders require an unconditional personal guarantee from every owner with 20% or more of the business. Three features of that document matter a great deal and get misunderstood all the time.

• It's for the whole balance. If you own 40% of the business you're not liable for 40% of the loan. You're liable for all of it, and so is every other guarantor. Lawyers call this joint and several liability. The lender can go after whichever guarantor has the most reachable assets.
• It's unconditional. You can't argue that the seller misrepresented the numbers, that the lender should have caught it, or that rates moved against you. Those might be real grievances. They don't reduce the guarantee.
• It may be secured. If the business didn't have enough collateral to cover the loan, the lender probably took a lien on personal assets, most often a second mortgage on your home. Check your closing documents. A surprising number of owners don't remember signing that one.

The order things get taken

Collection follows a sequence, and knowing it tells you where you still have leverage.

1. Business assets first. Trucks, equipment, receivables, inventory. The lender sells these, often at auction and often for a fraction of what's on the books. Every dollar recovered here reduces what's pursued from you.
2. Pledged personal collateral. If a lien was taken on your home, the lender can foreclose on it, though most would rather negotiate, since a second-position foreclosure is slow and messy.
3. The guarantee itself. The lender (or later the SBA) can sue on the guarantee, get a judgment, and use it against bank accounts, wages, and other assets, subject to state law.
4. Treasury. Once the SBA pays the lender's guarantee and its own collection efforts fail, the balance goes to the U.S. Treasury. Treasury adds a collection fee, commonly around 28 to 30 percent, and gets powers no private creditor has: it can offset federal tax refunds, offset part of your Social Security, and garnish up to 15% of disposable pay administratively, without a court judgment. Federal debt has no practical statute of limitations.

The three ways guarantors get released

1. A buyer takes on the loan and the lender and SBA approve your release

When a business is sold and the buyer refinances the SBA loan, or assumes it with lender and SBA approval, the original guarantors can be released. Be clear-eyed about the word can. SBA loans aren't freely assumable, and a change of ownership doesn't release you on its own. Release requires the lender and the SBA to approve a substitution of borrower with release of the original guarantor, and that approval is discretionary. In practice it's granted when the lender is getting a stronger credit than it had, which for a business that's losing money means an operator with a plan and a track record, not another first-time buyer who needs a loan of his own. When it works it's the cleanest exit there is, and in a distressed sale it's often the entire consideration: the buyer takes the debt, you take the release, and you walk away whole.

2. The loan gets restructured around a business someone is now running

This is the path most owners don't know exists. An operator takes control of the business and brings the lender a restructured loan (a longer term, an interest-only stretch, sometimes a partial write-down) backed by a turnaround plan. The lender gets a performing loan instead of a liquidation. You stay in the business, with a minority stake and an earnout in our hybrid structure, and negotiate release from the guarantee as the business recovers and the operator's entity steps into the obligation. It isn't instant. It is the path that preserves the most value for everyone at the table, including you.

3. The business closes and you settle through an Offer in Compromise

If the business can't be saved, the SBA's Offer in Compromise lets a guarantor settle for less than the full balance. It requires the loan to be in liquidation, the business closed and its assets sold, and an offer that reflects what the SBA could otherwise collect from you. Lump-sum offers do much better than installment plans. Hire an attorney who does SBA workouts specifically. A rejected offer means Treasury.

What doesn't release you

• Closing the business. That ends the business's obligations. Not yours.
• The business filing bankruptcy. A Chapter 7 or Chapter 11 (including Subchapter V) of the business doesn't discharge your personal guarantee. Only a personal bankruptcy can do that, and it has its own consequences.
• Selling the assets yourself for cash. Without the lender's consent you may be converting collateral, which makes everything worse.
• A handshake with the servicing rep. Releases are written, signed, and specific. Get it in writing.

If you're reading this before the lender has called

You're in the strongest position you're going to be in. The guarantee is a threat, not yet a claim. The business still has assets, customers, and a crew, which means it still has value to a buyer or a turnaround partner, which means the lender still has a reason to negotiate. Three things to do this week:

1. Pull your loan documents and confirm what the guarantee covers and whether any personal collateral is pledged.
2. Build a 13-week cash forecast. Honest, not hopeful. You'll need it for the lender and for anyone you bring in.
3. Talk to someone who has sat across from an SBA lender in a workout. Whether that's us, an SBA workout attorney, or both, don't walk into that room alone.