SBA Lending Guarantors: What to Know

SBA LOAN GUARANTORS FAQ

What is an unconditional 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.

Individuals who own 20% or more of the borrowing business must provide an unlimited full 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.

Guaranty may be secured or unsecured but must meet SBA’s collateral requirements. For loans over $350,000 if the loan is not fully collateralized by fixed assets or by the equity value of your practice, available equity in personal real estate must be pledged if you have 25% or more equity.

Am I the guarantor or the business?

SBA loans cannot be made solely to an individual. The business must be either the Borrower or a Co-Borrower.

Who has to guaranty an SBA loan?

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, or any partner that is involved in management of the applicant business.

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

Each loan must be guaranteed by at least one individual or entity. If no one individual or entity owns 20% or more of the Applicant, at least one of the owners must provide a full unconditional guaranty.

Individuals who own 20% or more of an Applicant must provide an unlimited full guaranty.

When ownership interest of an Applicant is held by a corporation, partnership or other form of legal entity, the ownership interests of all individuals must be disclosed. 

When deemed necessary for credit or other reasons, the SBA Lender, may require other appropriate individuals or entities to provide full or limited guaranties of the loan without regard to the percentage of their ownership interests, if any. 

For example, an individual with a minority ownership or no ownership interest in the Applicant or operating company who is critical to the operation of the business may be required to provide a personal guaranty.

Does my spouse have to guaranty?

If the spouse does not own any percentage of the borrower’s business then the spouse does not have to guarantee the loan. 

For less established borrowers whose loan is 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.

Do I have to guaranty if a trust is involved?

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 an owner reduce equity to avoid 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).

What documents does a guarantor need to provide?

SBA Guaranty Documents Include:

Personal Financial Statement on all owners of 20% or more (including the assets of the owner’s spouse and any minor children), and proposed guarantors.

Business financial statements and/or tax returns. Documents include:

Year End Balance Sheet for the last three years, including detailed debt schedule

Year End Profit & Loss Statements for the last three years

Reconciliation of Net Worth

Interim Balance Sheet

Interim Profit & Loss Statements

Affiliate/Subsidiary financial statement