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Small Business Administration (SBA) loans are backed by the US government to expand access to capital for small businesses. They typically offer lower interest rates, more flexible loan terms, and longer loan maturity periods than conventional business loans. In exchange for that support, you are usually required to sign an SBA loan personal guarantee, making you personally liable if your business can’t repay the loan.
Understanding how this requirement works—along with how it relates to collateral, loan approval, and overall risk—can help you decide whether SBA lending is the right fit for your business needs.
What is an SBA loan?
An SBA loan is issued by a private bank or lender but partially guaranteed by the US Small Business Administration (SBA). Because the federal government backs a portion of the loan amount, SBA lenders are more willing to provide funding to small businesses that might not qualify for conventional financing. The loans are usually subject to more flexible eligibility requirements, longer payment terms, and sometimes even lower interest rates compared to traditional bank loans.
SBA loans can be used to purchase business equipment, cover operating expenses, acquire or rent commercial space, or refinance existing debt. Different programs—such as SBA 7(a) loans and industry-specific options—offer varying maximum loan amount limits, interest rates, and loan maturity terms.
Although the SBA guarantee reduces risk to lenders, the borrower is still responsible for full repayment. For that reason, most SBA loans involve both collateral and a personal guarantee, giving the lender a way to recover funds if the business fails.
Why does an SBA loan require a personal guarantee?
SBA loans typically require a personal guarantee because the business itself may not have enough assets or operating history to secure financing on its own. Under the general rule of SBA lending, any business owner with 20% or more combined ownership interest must personally guarantee the loan. This requirement is generally non-negotiable.
The personal guarantee gives the lender an additional layer of protection. If the business can’t repay, the guarantor becomes personally liable, meaning their personal assets may be used to cover the remaining balance. This applies even when the business structure limits owner liability, such as with a limited liability company (LLC) or limited partnership (LP).
SBA loan personal guarantee risks
While an SBA loan’s personal guarantee protects the lender, it adds risk for the business owner, especially given the unpredictable nature of starting a business. “You don’t know how quickly you’re going to turn product or inventory you purchase,” Matthew Scanlan, founder of clothing brand Naadam, says on an episode of the Shopify Masters podcast. “So if you go out and buy it, and it takes you six months [to sell] and you planned for it to take three, it’s a really easy way to go bankrupt unless you can extend your cash flow.”
The risk of a personal guarantee goes beyond your own assets; it can also affect how your business grows. Personally guaranteeing a loan can create a disconnect if you later bring on investors, since you’re carrying liability that other stakeholders don’t share.
“I wouldn’t recommend taking SBA loans that you personally guarantee if you’re going to have investors around the table at any point,” Matthew says. “Your incentives are never going to be aligned unless they’ve agreed to pay that off and/or transfer that guarantee to the entity and can guarantee it themselves.”
Personal guarantee vs. collateral
Although related, a personal guarantee and collateral serve different purposes in SBA loans.
Collateral refers to specific assets pledged to secure the loan, such as business equipment, accounts receivable, fixed assets, real estate, and inventory. If the borrower defaults, the lender obtains these assets and can sell them to recover the outstanding loan balance.
A personal guarantee, by contrast, is a legal promise that the guarantor will repay the loan if the business fails. Unlike loan collateral, it isn’t limited to pledged assets. The lender may pursue the guarantor’s personal assets as well.
Although SBA loans require collateral whenever available, inadequate collateral doesn’t automatically disqualify you. The SBA requires lenders to secure what they reasonably can, but a shortfall in assets alone won’t necessarily prevent loan approval.
Unlimited vs. limited personal guarantees
Not all personal guarantees are structured the same way. Depending on the borrowing company’s ownership structure, guarantors may sign either an unlimited personal guarantee or a limited personal guarantee.
Unlimited personal guarantees
With an unlimited personal guarantee, the lender may pursue the guarantor’s personal assets—savings, property, or other financial resources—until the debt is repaid. This structure is common when there’s a single owner or a small number of owners.
Limited personal guarantees
With limited personal guarantees, the amount each guarantor owes in the event of default is contractually limited (capped at a set amount or percentage defined in the loan agreement). This arrangement is more common when multiple owners share responsibility for the loan, with liability typically assigned based on each owner’s combined ownership interest.
Alternatives to providing a personal guarantee for an SBA loan
The SBA almost always requires a personal guarantee for loan approval, but certain lenders and alternative financing providers offer products that may not require one. Here are three alternatives if you’re unable to provide a personal guarantee or adequate collateral for an SBA loan.
Unsecured business loans
Some lenders offer unsecured business loans that don’t require collateral. These rely more heavily on the borrower’s credit, revenue history, and whether your business shows strong financial performance. They can still be an option for newer businesses with shorter track records, but because there’s no collateral, lenders typically charge higher interest rates and impose shorter repayment timelines than SBA or traditional bank loans.
Revenue-based financing
Revenue-based financing provides funds to a business in exchange for a percentage of future cash flow. Because repayment adjusts with the borrower’s revenue, this option can help small businesses manage financing when income fluctuates.
Equipment financing
If a business is using a loan to buy equipment, some specialized lenders will allow them to use the equipment as collateral, reducing or eliminating the need for a personal guarantee. Although these alternatives may help some borrowers, many lenders still prefer a form of guarantee because it reduces their overall risk.
SBA loan personal guarantee FAQ
Do SBA loans need a personal guarantee?
Yes. Most SBA loans require a personal guarantee from any owner with a 20% or more ownership stake in the business.
Are people personally liable for SBA loans?
Yes. If you sign an SBA loan personal guarantee, you become personally liable if your business cannot repay the loan.
How do I know if my SBA loan has a personal guarantee?
Your lender will include the requirement in the loan documents, typically through an SBA form or equivalent form provided by the lender and signed after approval.
What happens if I default on an SBA loan?
The lender may liquidate collateral first, then pursue your personal assets to recover the remaining loan amount.
*All loans through Shopify Capital Loans are issued by WebBank. Offers are subject to change based on several factors including your store’s performance and the review of your financial information. Shopify Capital Loans must be paid in full within 18 months, and two minimum payments apply within the first two six-month periods. Offers to apply do not guarantee funding. Repayments are made based on a percentage of daily sales.
