HomeWhen Is An SBA Guarantee Legally Unenforceable?

When Is An SBA Guarantee Legally Unenforceable?

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When Does an SBA Guarantee Lose Its Legal Teeth?

Navigating the murky waters of business finance is no mean feat. It’s one of the major hurdles smaller businesses often grapple with. Fortunately, Small Business Administration (SBA) loan programs serve as lifebuoys for many. But, without sufficient collateral, both the SBA lender and the SBA itself usually demand a personal guarantee before giving a loan the green light.

However, Lawscape, at the Lawscape, cautions that certain conditions may render an SBA personal guarantee legally void. Let’s dive deeper into what an SBA personal guarantee is and the potential liabilities it carries. We’ll also examine the factors that can make it unenforceable, and various scenarios where such guarantees could be revoked.

Deciphering the SBA Personal Guarantee Jigsaw

Now, an SBA personal guarantee essentially boils down to one individual promising to repay the debt for the small business at bench -usually the borrower. Simply put, the SBA personal guarantor is the one making this promise, which often happens to be a key shareholder or member of the borrowing small business.

The SBA’s Standard Operating Procedures (SOP) explicitly demand that SBA lenders should obtain the personal guarantees of anyone owning a minimum of 20% of a small business’s stake.

Assuming Liabilities with an SBA Personal Guarantee

Providing an SBA personal guarantee for your small business implies taking personal responsibility for repaying that debt if your business goes belly up. But hey, that’s not the worst part. What’s more daunting is that you pledge your personal treasures as security -your home, your savings, heck, even your future earnings, which could all be seized by the SBA lender or the SBA.

What Makes an SBA Personal Guarantee Unenforceable?

Whether you’re an entrepreneur or a small business owner, understanding the possible implications of penning an SBA personal guarantee is paramount. For it to be enforceable, the SBA personal guarantee has to meet certain prerequisites.

An SBA personal guarantee must be crafted in writing and signed by the SBA guarantor in their personal capacity. Any individual signing the guarantee has to sign as an individual, and not in their business capacity, such as “CEO” or “President”.

Enforcing Contracts and The Role of Consideration

Ever wondered why contracts are legally enforceable? Well, it arises from the concept of “consideration”. A contract is simply an enforceable promise, and in this case, the SBA lender extends an SBA-guaranteed loan (the consideration) in exchange for the SBA personal guarantor’s pledge to repay it. However, there can be instances where parties to an SBA loan arrangement are unable to produce adequate documentation to prove a right to collect on the loan.

Legal Violations and Fraudulence

In some instances, an SBA personal guarantee may be considered legally void. This typically happens if it was acquired fraudulently or infringes federal laws or public policy. For instance, this could happen if a spousal guarantee is required from a non-owner or non-employee of the small business which could violate the Equal Credit Opportunity Act (ECOA) thereby rendering the SBA personal guarantee null.

Revoking an SBA Personal Guarantee

Good news is, an SBA personal guarantee can be revoked in various situations, for instance, when both parties agree in writing (acknowledged by the SBA). Some debts owed by SBA personal guarantors can also be wiped out in bankruptcy or declared invalid via a court order through litigation.

Yes, it’s complex! But remember, every scenario is unique, so if you have queries about the legal enforceability of an SBA personal guarantee – either one you’re contemplating signing or one you’ve already inked, Lawscape at the Lawscape is your man.

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The Lawscape has negotiated repayment agreements and resolved SBA debts amounting to millions of dollars via Offer in Compromise without inducing bankruptcy or home foreclosure.

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The vetted attorneys at the Lawscape are certified by the Agency Practice Act to represent Federal Debtors from all corners of the nation before the SBA, The SBA Office of Hearings and Appeals, The Treasury Department, and The Bureau of Fiscal Service. Contact us now to fix an appointment and discuss your SBA loan conundrums.

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If you’re struggling with business debt, we can help you understand your situation. During the initial consultation, we’ll go over the contract, and other legal documents you signed. After that, our firm will work with you to get a better understanding of your situation, and help you come up with a game plan that keeps your business alive. 

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Everyone has different types of business debt. What matters is that you take it seriously. Regardless of whether it’s secured, or unsecured, you need to work with a firm that understands how to negotiate, reduce, settle, and manage, this business debt. 

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