Why the Required SBA Personal Guarantee is an Asymmetric Bet

Here’s why – with relatively small risk and huge reward!


1) Most borrowers have their Net Worth in their home equity and 401k or IRA.

Retirement accounts are already protected from bankruptcy. And there’s ways to prevent the SBA from taking a lien on your primary home (live in TX or have <25% equity or get there via HELOC).

1B) This means if the absolute worst case scenario happens where you can’t service your SBA loan and are driven to bankruptcy, most of your accumulated Net Worth could still survive. But…
2) This rarely happens.

Default rates on SBA 7A Acquisition loans are in the 2-3% range, which means 97% are paid off successfully.

3) The SBA loan process + good due diligence = lots of safety built into the deals.

Borrowers have to prove adequate post-closing cash flows and liquidity with a 20-50% cushion (Debt Coverage Ratio). Plus a 3rd party business appraisal. Your own QofE reports, etc.

4) Your downside, worst-case is usually 6-figures of loss and bad credit.

Your upside (90+% likely) is owning a 7-figure or greater asset that paid for itself in less than 10 years, usually can be paid off in 3-5 years if aggressive, and life-changing profits in perpetuity.

5) There’s a lot of grey area in between a bankruptcy/bust and a Home Run investment.

If you got into a biz that turns out wasn’t the dream you thought it was, you can usually sell it if you have to and not take a total loss. Poor investments aren’t fatal. Learn and move on.

6) In my experience the riskiest SBA deals are the smallest ones with the weakest $ Buyers.

You can reduce your risk by buying above $500K SDE deals, increasing your down payment % and liquidity/reserves. This is huge. For max safety, don’t go max leverage.

7) Figure out how much physical assets your acquisition has vs its goodwill (intangible value).

Once you owe what you could sell the physical assets for, you’re essentially “out of the woods” and this happens often years before you’re paid off.

7B) Many deals this means you are “safe” within 1-3 years, and could always liquidate and cover the debt if absolutely necessary by selling off the tangible assets. i.e. it doesn’t take the full 10 years before you’re “safe”.


Summary: If you have a chance to turn $100K into $1M+ or $300K into $3M+ in 3-10 years time, with 90%+ odds of success, you should strongly consider doing so. Of course do good Due Diligence. Of course don’t YOLO into things carelessly.

But learn how to do it right!



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