Guaranty & Liens:

Is a personal guaranty required from the borrower?

Owners having 20% or more of the borrowing business must provide a personal guaranty. Lenders may require other individuals to guarantee the loan as well. The guaranty by owners of less than 20% may be limited or full. All individuals guaranteeing the loan must provide a personal financial statement.

What is an unlimited personal guaranty?

An Unlimited Personal Guaranty is where the borrower/guarantor is guaranteeing the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting on the loan.

What are the guaranty requirements?

• For a sole proprietorship, the sole proprietor.
• For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm.
• For a corporation, all owners of 20% or more of the corporation and each officer and director.
• For limited liability companies (LLCs), all members owning 20% or more of the company and each officer, director, and managing member.

Does my spouse have to guarantee the loan?

If the spouse does not own any percentage of the borrower’s business then the spouse does not have to guarantee the loan. For smaller and newer advisors and for loans that are borderline for approval, a spouse who generates income can be added as a guarantor to help push the loan over the approval line with the lender.

For SBA loans, if a spouse of an owner owns any percentage, and the spouse's equity and the owner's equity combined equals 20% or more, the spouse also has to be a guarantor. So, if an owner has 19% equity and their spouse has 1% equity then both must be guarantors.

Is a guaranty required if an entity that has ownership is a trust?

If the entity that owns 20% or more of the business is a trust (revocable or irrevocable), the trust must guarantee the loan with the trustee executing the guaranty on behalf of the trust and providing the required certifications. In addition, if the trust is revocable, the trustee also must guarantee the loan. Financial statements are necessary to determine the assets available to support the guaranty.

Can I reduce ownership interest to avoid a guaranty?

For SBA loans, any person subject to the personal guaranty requirements six months prior to the date of the loan application would continue to be subject to the requirements even if that person has changed his or her ownership interest to less than 20%.

The only exception to the six-month rule is when that person completely divests his or her interest prior to the date of application. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the business in any capacity, including being an employee (paid or unpaid).

Is the lender going to place a lien on my business?

Yes. The lender will file a UCC-1 blanket lien against your advisory business for all current and future business assets.

Is a business lien applied on only the clients being purchased?

No. It applies to all your current, acquired, and future clients.

Does a lender require that they are in first lien position?

Almost always.

How does the lender lien position impact the lender(s) I use in the future?

You will not be able to use multiple lenders (for any significant loan amounts) for different business loans. Lenders generally require to be in first lien position but only one lender can be. If a different lender is needed (or wanted) for your second loan, they will typically refinance your existing loan and roll it into the new loan. This places the new lender in first lien position.

What happens if the seller’s business has a lien on it when the loan closes?

This will come up in the lenders lien searches. If there is an outstanding lien on the business/clients you’re purchasing, the bank will payoff that lien at closing if the seller does not pay it off before. The lender will require a payoff letter and need wiring instructions for the party holding the lien. Of course, the seller can payoff the lien and get a lien release before the loan closes if they choose.

What about substituing a guarantor?

Substitution of Personal and/or Corporate Guaranty Liability The SBA Notice Info Notice 5000-848663, issued on October 10, 2023, marks a significant update to SBA loan policy by introducing the ability for borrowers to substitute personal and/or corporate guaranty liability under certain conditions. This report provides a detailed analysis of the Notice, exploring its implications for borrowers, lenders, and the overall SBA loan ecosystem.

Key Points:

Scope: This Notice applies to both 7(a) loans (full and partial changes of ownership) and 504 loans (partial changes of ownership only).

Substitution Allowed: With SBA approval, borrowers can now replace existing personal and/or corporate guarantors with qualified substitutes. This potentially offers greater flexibility for borrowers facing changes in business ownership or personal circumstances.

Conditions: Approval for substitution is contingent on several factors, including the good standing of the loan, the financial strength and eligibility of the proposed substitute guarantor, and the absence of adverse impact on the SBA's financial interests.

Original Guarantor Liability: The original guarantor may still be liable for certain obligations incurred before the substitution is approved.