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EIDL Personal Guarantee: What You Need to Know

EIDL Personal Guarantee: What You Need to Know
Susan Guillory
Susan GuilloryUpdated May 2, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re considering an Economic Injury Disaster Loan (EIDL) because your business has been hit hard by the coronavirus pandemic, it’s a good idea to make sure you fully understand the implications.Among the topics you should understand thoroughly before you apply for, receive, and use your EIDL loan is whether or not there is an EIDL personal guarantee requirement. A personal guarantee (or, as the SBA calls it, a personal guarantee) can impact your personal credit and finances, so knowing whether you will be held personally responsible for the EIDL loan is important.

What Is a Personal Guarantee?

When you take out a small business loan, it’s your business that is responsible for paying it back. But what happens if your business stops operating or can’t pay the loan back? In the lender’s eyes, someone has to be responsible for the loan if the business can’t be, and that someone is typically you and any other owners.Thus, when your business takes on certain small business loans, you may be required to provide a personal guarantee. A personal guarantee means that, should the business not be able to pay the loan, you personally agree to be held responsible for paying it.Read on for some SBA EIDL personal guarantee requirements that you need to be aware of.Recommended: What is a Personal Guarantee?

What Kinds of EIDL Loans Require a Personal Guarantee?

The EIDL program provides loans of up to $2 million to small businesses impacted by the COVID-19 pandemic. There are several criteria to qualify, including an EIDL credit score requirement of 570 or higher for a loan of $500,000 or less, and 625 or higher for a loan greater than $500,000.Loans under $200,000 do not require a personal guarantee, but there is an EIDL personal guarantee for loans above that amount.The guarantee is required of all individuals or entities that own 20% or more of the business. If no single owner has a 20% or greater stake, at least one individual or entity must provide the full guarantee.Recommended: What Does EIDL Stand For & What Is It?

EIDL Collateral Requirements

In addition to the EIDL loan personal guarantee, there may also be a collateral requirement, depending on how much you borrow. For loans of $25,000 or less, there is no collateral requirement. For loans of $25,001 to $500,000, a security agreement, called a UCC-1, is required on business assets. These assets cannot typically be real estate.For loans of $500,001 to 42,000,000, a UCC-1 is required on business assets as well as the best available mortgage on real estate owned by the business. That UCC-1 security agreement or lien says that, should your business not be able to pay back the loan, the lender (the SBA) has the right to seize your business assets to cover the debt. If you need a UCC-1, SBA will charge a one-time $100 fee for filing it. Additionally, you’ll be responsible for recording the real estate lien if it is required and paying any related fees. 

Types of Collateral You Can Provide

Some options for assets you can put up as collateral for your EIDL loan include:
  • Accounts receivable
  • Inventory
  • Equipment

Terms of the EIDL Loan

EIDL loans have a repayment period of 30 years, with a fixed interest rate of 3.75% for businesses and 2.75% for private nonprofits.Payments on the COVID-19 EIDL can be deferred for two years (interest will accrue during that period), and there is no EIDL prepayment penalty.If your application is denied, the SBA will send a letter with the reason for the denial. If you feel your business still qualifies, you can submit an EIDL reconsideration letter with supporting documentation to be reconsidered.

What Happens if You Default on an EIDL Loan?

If you aren’t able to continue repaying your EIDL loan, one of two things will happen. The SBA may consider the loan to be delinquent, meaning you’ve missed one or more payments but are expected to continue paying. Or you’ll be considered in default, meaning the SBA believes you will not be paying any more on your loan.If you’re considered delinquent (the less serious of these two scenarios), you may be able to arrange with the SBA to catch up on payments. You may be charged a late fee.If your business goes into default, however, you may be personally liable for paying off the loan, even if your business has closed. Also, if your loan was more than $25,000, those assets you put up as collateral can be seized to cover the debt.Additionally, both your business and you personally may receive negative marks on your credit report. Your scores may go down, and this may impact your ability to take out financing in the future.The worst thing you can do is to ignore any letters from the SBA demanding payment. Even if you can’t afford to pay what you owe in full, you may be able to work with the SBA to refinance the loan so that you have smaller monthly payments, or you could submit an offer in compromise, which is the amount you can afford to pay as a settlement to avoid legal proceedings.Defaulting on your EIDL loan, or any other loan, for that matter, should be your absolute last option. Making an effort to work with the SBA to pay what you can could go a long way to avoid reducing your chances of getting financing down the road.Recommended: What to Do if You Can’t Pay Back Your Pandemic-Relief Loan

Alternative Small Business Loan Options

If you don’t qualify for the EIDL program, or you’ve already maxed out what you can borrow and you still need financing, here are other financing solutions to consider.

Traditional Loans

Banks and credit unions offer business loans with competitive interest rates. You’ll need excellent credit to qualify.

SBA Loans

The EIDL is just one of many loans offered by the Small Business Administration. The 7(a) program is popular, and loan proceeds can be used for all manner of business-related expenses.

Alternative Loans

For those with less-than-stellar credit, there are online lenders who look at other qualifications besides credit scores.

Line of Credit

If you’d prefer to have access to cash when you need it rather than getting it all at once, a line of credit can provide it.

Business Credit Cards

Credit cards can give you the power to purchase what your business needs, and many come with rewards you can redeem for travel or cash back.

Merchant Cash Advances

While they’re not loans, merchant cash advances front your capital based on sales numbers and don’t weigh your credit scores as heavily as other options.

Equipment Loans

If you want to purchase equipment for your business, such as machinery or a company vehicle, equipment loans use the equipment as collateral, and can offer low rates.

The Takeaway

The COVID-19 EIDL loans played a role in helping businesses through the pandemic. The program is over, but there are still many other funding possibilities, such as business lines of credit and merchant cash advances, to name just a couple.With so many small business financing options available, where do you start? With Lantern by SoFi, you can apply for a small business loan and get a match with a provider.
Photo credit: iStock/FG Trade

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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