LOANOLOGY

GUARANTY & GUARANTORS

Loans When a Seller Guaranty May Be Required

Acquisition Guaranties
In addition to the standard 20% ownership guaranty a bank can require additional guarantors if the net worth of the borrower is too light or the overall deal risk would not enable the loan to be approved without an additional guarantor.

Conventional Equity Buy-ins
Any remaining partner with 20% ownership has to either be a part of a corporate guaranty or a grantor note, either way a lien is placed on the entire entity.

SBA Equity Buy-ins
Any remaining partner with 20% ownership has to guaranty the loan.

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

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.

Guaranty may be secured or unsecured but must meet SBA’s collateral requirements. For loans over $500,000 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.

Loan Guaranty

Each loan necessitates at least one guarantor, whether individual or corporate. Should there be no individual or entity holding a minimum of 20% ownership in the applicant entity, at least one of the owners is mandated to provide an unconditional, full guarantee.

Spousal Guarantee

In cases where a spouse owns less than 20% of an applicant entity, a full personal guarantee is mandatory when the combined ownership stake of both spouses and their minor children equates to or exceeds 20%. Non-owner spouses are required to sign the appropriate collateral documents. The guarantee of the spouse, secured by jointly held collateral, will be limited to the spouse's interest in said collateral.

Individual Guarantees

Owners who hold a 20% or greater stake in an applicant entity are obligated to provide a full, unrestricted guarantee. In cases where the applicant's ownership is vested in a corporate entity, partnership, or any other legal entity, full disclosure of every individual's ownership interest is mandatory. Depending on the credit or other relevant factors, additional individuals or entities might be required to provide full or limited guarantees for the loan, irrespective of their ownership percentages. For all loan guarantors, the SBA lender must procure a personal financial statement, with an exception for 7(a) loans and 504 projects less than or equal to $500,000.

Change of Ownership

Any individual (as defined in 13 CFR 120.10) who was subject to the guarantee requirements half a year prior to the date of the loan application is still required to comply with these requirements, even if they have reduced their ownership stake to less than 20%. The only exception applies when the individual has completely divested of their interest before the application date. Complete divestiture involves relinquishing all ownership stakes and severing all relations with the applicant (and any affiliated Eligible Passive Company), including employment (whether paid or unpaid).

Corporate, Trust, & Other Guarantees

All entities with a minimum 20% ownership in an applicant entity are required to provide a full, unrestricted guarantee. If the owner is a trust (revocable or irrevocable), the trust should guarantee the loan, with the trustee signing the guarantee on behalf of the trust and providing required certifications. If the trust is revocable, the Trustor must also guarantee the loan.

Supplemental Guarantor

This is a person or entity mandated by a Lender to provide a guarantee due to prudence and is not required by SBA Loan Program Requirements to provide a guarantee.

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

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.

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