Before we dive in, a quick note:

I have a business called SMB Business Plans that I run with my partner Joe Thomas. We help write business plans for business buyers looking to take out SBA Loans to fund their acquisitions. We know exactly what SBA lenders look for in a business plan, so we can write up a plan that will check all the boxes. Check it out here.

Welcome back to the Buyer Advocate!

SBA 7(a) loans are one of the absolute best tools individuals have for wealth building.

They allow everyday people to buy businesses, provide jobs, and grow the economy.

In case you've never met me, I absolutely love the SBA 7(a) loan program.

But there are some risks that you must understand.

In this newsletter, we'll dive into:

• The SBA's Unconditional Guarantee (SBA Form 148)
• Real estate liens
• Potential for lenders to pursue personal assets, even without an initial lien.

For personalized guidance, feel free to reach out to me directly at matthias@pioneercap.com. Additionally, my companies—SMB Business Plans and Pioneer Tribe Insurance Solutions—offer specialized services to support business buyers through the acquisition process.

Personal Guarantees: Understanding SBA Form 148

When securing an SBA 7(a) loan, individuals owning 20% or more of the business are required to sign an Unconditional Guarantee, or SBA Form 148). Here's what this guarantee involves:

1. Unconditional Obligation​
   You are personally responsible for repaying the loan if the business defaults, regardless of business performance.
2. Lender's Rights and Flexibility​
   The lender can modify loan terms, release other guarantors, or adjust collateral without notifying you, while maintaining your obligation.
3. Waivers of Rights and Defenses​
   You waive certain rights, including requiring the lender to act on business collateral before seeking repayment from you.

Real Estate Liens: When Your Home May Be at Risk

In addition to personal guarantees, the SBA often requires a lien on personal real estate if the equity exceeds 25%.

If the equity is below this threshold, the bank has discretion over placing a lien on your home.

Let's examine two scenarios involving a primary residence valued at $1 million for a business buyer.

Scenario A: SBA Bank Requires a Lien on Buyer's Primary Residence

Assumptions:

• Primary Residence Value: $1 million
• Current Mortgage Balance: $650,000
• Equity in Residence: $350,000 (35%)

With 35% home equity, the SBA bank would typically require a lien on the property to secure the loan.

This lien restricts your ability to refinance, sell, or further leverage the home without SBA lender involvement.

Takeaway:
With equity above 25%, a lien on your residence is likely required, affecting your financial flexibility.

Scenario B: SBA Bank May Not Require a Lien on Buyer's Primary Residence

Assumptions:

• Primary Residence Value: $1 million
• Current Mortgage Balance: $700,000
• Undrawn HELOC: $50,000
• Total Debt on Property: $750,000
• Effective Equity in Residence: $250,000 (25%)

To lower their effective equity below the threshold, I often advise clients to take out a Home Equity Line of Credit (HELOC), and leave it undrawn. In this case, their effective equity is reduced to 25%. The bank may choose not to place a lien, allowing more control over the property.

​

Takeaway:
With equity at or below 25%, the lien may be discretionary. Consult with your lender to understand their policies.

While it may seem counterintuitive that having more equity in your home is almost a punishment, it's because having too little equity means that the lender probably won't be able to recover much of their principal from your home equity if things don't work out.

Default and Pursuit of Personal Assets: Even Without a Lien

A critical point to understand is that even without an initial lien, the lender can pursue your personal assets if the business defaults.

The personal guarantee allows the lender to seek a judgment lien on your property through legal proceedings. This process involves:

1. Obtaining a Judgment​
   The lender sues for the outstanding debt and, if successful, obtains a judgment against you.
2. Attaching a Judgment Lien​
   The judgment can be used to place a lien on your personal property, including your residence.
3. Enforcing the Lien​
   The lender may enforce the lien, potentially leading to foreclosure to satisfy the debt.

Case Law Example: Curry v. U.S. Small Business Administration

In Curry v. U.S. Small Business Administration, (see case details here), the borrower defaulted on an SBA loan secured by a deed of trust on her home. The SBA then initiated foreclosure proceedings to recover the debt. This case illustrates that the SBA can and will pursue personal assets, including real estate, to satisfy defaulted loans.

Scenario C: Bank Pursues Residence After Default Despite No Lien at Closing

Takeaway:
​
Even without a lien at closing, your residence could be at risk if the business defaults. The lender can seek a judgment lien to recover the debt.

How We Support Business Buyers

Beyond financing expertise at Pioneer Capital Advisory, my other companies offer essential services for business buyers.

SMB Business Plans: Expert Business Plan Development

A comprehensive, SBA-compliant business plan is crucial for securing financing. SMB Business Plans, led by Joe Thomas, specializes in crafting acquisition business plans that meet SBA standards.

For assistance, contact Joe at joe@smbbusinessplans.com or visit https://www.smbbusinessplans.com/.

Pioneer Tribe Insurance Solutions: Customized Insurance for Acquisitions

Insurance is vital for protecting your investment. Pioneer Tribe Insurance Solutions, managed by Jelani Fenton, offers tailored insurance solutions for business buyers. Visit https://www.pioneertribeinsurance.com/ or reach out to Jelani at jelani@pioneertribeinsurance.com

​

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.