Economic Injury Disaster Loans (EIDL) were introduced by the Small Business Administration (SBA) to help businesses that suffered financially due to the COVID-19 pandemic. These loans offered much-needed support for struggling businesses, but many borrowers have questions about the terms and conditions, especially when it comes to personal guarantees.
In this blog post, we will explore whether EIDL loans are personally guaranteed. We will break down everything you need to know about these loans, including when a personal guarantee is required, who is responsible for repaying the loan, and what happens if the business defaults.
Key Points:
- Loans over $200,000 often require a personal guarantee.
- Loans under $200,000 do not require a personal guarantee.
- Borrowers with 20% or more ownership are typically required to sign the guarantee.
What is a Personal Guarantee?
A personal guarantee is a legal agreement where an individual agrees to personally repay a loan if the business defaults. For small business loans, it’s a common requirement that ensures the lender has some form of security in case the business cannot pay back the loan.
For EIDL loans, the SBA does not always require a personal guarantee. The terms depend on the loan amount and other factors like ownership.
Do EIDL Loans Require Personal Guarantees?
The general rule is simple: EIDL loans under $200,000 do not require a personal guarantee. However, for loans that exceed $200,000, the SBA may require a personal guarantee from any individual with 20% or more ownership in the business.
EIDL Loan Amount and Personal Guarantee
Loans below $200,000: These loans do not require a personal guarantee. The SBA allows business owners to borrow the money without committing their personal assets to the loan.
Loans above $200,000: A personal guarantee is required for loans above $200,000. In this case, the SBA typically wants a guarantee from someone who has 20% or more ownership in the business. If no single owner meets this requirement, then at least one person with significant ownership will need to provide the guarantee.
Important Note: Loans below $25,000 are considered unsecured loans and do not require a personal guarantee at all, regardless of ownership.
When Are You Personally Liable for the EIDL Loan?
For loans above $200,000 that require a personal guarantee, the person signing the agreement is personally liable. This means if the business cannot repay the loan, the individual who signed the guarantee could be held responsible for the remaining debt. Personal assets, such as savings, property, and other valuables, could be used to repay the debt.
This is a significant commitment and is one of the reasons why borrowers must carefully consider whether they are willing to take on this responsibility.
Are There Collateral Requirements for EIDL Loans?
In addition to personal guarantees, some EIDL loans also require collateral. For loans over $25,000, the SBA typically asks for a security interest in the business’s assets. This collateral could include inventory, equipment, or other business property.
However, personal assets like homes or cars are generally not required as collateral for EIDL loans.
EIDL Loan Collateral vs. Personal Guarantee
| Loan Amount | Personal Guarantee | Collateral Requirement |
| Under $25,000 | No | No |
| Over $25,000 | Yes (for loans over $200,000) | Yes (business assets) |
| Over $200,000 | Yes (for owners with 20%+ ownership) | Yes (business assets) |
Important Note: Collateral requirements are separate from personal guarantees, but they still add a layer of security for the lender.
What Happens if You Default on an EIDL Loan?
If the business defaults on the EIDL loan, the SBA can take action to recover the money. For loans over $200,000 with a personal guarantee, the borrower may have to repay the loan from their personal assets. The business could also face penalties, and the SBA may pursue collections on any outstanding debts.
Example: If a business borrows $300,000 and defaults, the owner who signed the personal guarantee would be responsible for repaying the full amount, using personal assets if necessary.
Can You Be Released from a Personal Guarantee?
Once you sign a personal guarantee, it’s not always easy to get out of it. However, it’s possible to be released from the guarantee under certain conditions. For example, if the loan is paid off in full or the business is sold, the borrower may be able to request a release from the guarantee.
Additionally, in some cases, a new guarantor can be substituted in place of the original one. It’s important to work with the SBA or a financial advisor to understand the specific steps involved.
Can You Avoid Personal Liability with an EIDL Loan?
To avoid personal liability, a business should ensure that the loan amount stays below $200,000. Additionally, business owners with less than 20% ownership are not required to provide a personal guarantee. By keeping the loan within these limits, business owners can avoid personal liability.
Example: A business borrowing $180,000 does not require a personal guarantee. The owner would not be personally liable for repayment in the case of default.
Is the Personal Guarantee the Same as Pledging Collateral?
While a personal guarantee involves the borrower agreeing to repay the loan personally, collateral refers to business assets that can be seized to repay the loan. These are two separate requirements, although both provide security for the lender.
Important Note: A personal guarantee puts your personal assets at risk, while collateral limits the lender’s claim to business assets only.
Conclusion
In conclusion, whether EIDL loans are personally guaranteed depends on the amount of the loan. For loans under $200,000, there is no personal guarantee requirement, and business owners are not personally liable. However, for loans exceeding $200,000, personal guarantees are required from individuals with 20% or more ownership in the business.
It’s essential to carefully review the terms and conditions of any loan before accepting it to understand the responsibilities and risks involved. By knowing when personal guarantees are required, business owners can make informed decisions that protect their personal assets.
FAQ’s
- What is a personal guarantee for an EIDL loan?
A personal guarantee means you are personally responsible for repaying the loan if your business defaults. - Do I have to sign a personal guarantee for EIDL loans under $200,000?
No, EIDL loans under $200,000 do not require a personal guarantee. - What happens if I don’t repay an EIDL loan?
If you default on an EIDL loan with a personal guarantee, you may be personally liable for the debt and could risk losing personal assets. - Are my personal assets at risk with an EIDL loan?
Only if the loan amount exceeds $200,000 and a personal guarantee is required. In that case, personal assets could be used to repay the loan. - Can I substitute another guarantor for my EIDL loan?
Yes, in some cases, you can substitute another guarantor if the loan terms allow it. - Do I need to pledge collateral for an EIDL loan?
Collateral may be required for loans over $25,000, but personal assets like your home are not typically used as collateral. - Can I avoid personal liability on an EIDL loan?
Yes, by keeping the loan under $200,000 or ensuring you don’t hold 20% or more ownership. - Will the SBA take personal property for an EIDL loan?
The SBA typically does not take personal property for an EIDL loan, unless you have signed a personal guarantee.