LOANOLOGY

GUARANTY & GUARANTORS

Securing an SBA loan for your small business or franchise often requires guarantors—individuals or entities who pledge to repay the loan if your business can’t. Understanding guaranty requirements is crucial, whether you’re starting a new venture, acquiring an existing operation, or navigating an ownership change. Below, we outline the key guaranty rules and how LoanBox helps you meet them effectively.

When a Seller Guaranty May Be Required

Acquisition Guaranties

For acquisitions, lenders may require additional guarantors beyond the standard SBA rules to mitigate risk, particularly if the borrower’s net worth is limited or the deal carries elevated risk.

Standard Requirement: Owners with 20% or more ownership in the borrowing business must provide an unlimited personal guaranty, ensuring full liability for the loan amount, plus legal fees, accrued interest, and collection costs (per SOP 50 10 8).

Additional Guarantors: If the borrower’s financial strength is insufficient, lenders may request guaranties from other individuals, such as the seller or key stakeholders, to bolster the application’s viability.

Why It Matters: A seller guaranty can bridge gaps in borrower net worth, increasing approval odds for acquiring an existing business.

Conventional Equity Buy-Ins

In conventional loans for equity buy-ins (e.g., purchasing a partner’s stake):

  • Any remaining partner with 20% or more ownership must participate in a corporate guaranty or sign a guarantor note, placing a lien on the entire business entity.

SBA Equity Buy-Ins

For SBA loans involving equity buy-ins:

  • Any partner with 20% or more ownership is required to provide an unlimited personal guaranty, aligning with SBA’s standard ownership threshold.

  • Post-sale, owners with 20%+ equity (including the seller, if retaining equity) must provide a personal guaranty. Sellers retaining less than 20% must guarantee the loan for 2 years post-disbursement.

Types of Guaranties

Unlimited Personal Guaranty

An unlimited personal guaranty holds the guarantor liable for the full outstanding loan balance, including legal fees, interest, and collection costs.

  • Who Must Provide: Owners with 20% or more ownership in the borrowing business, per SOP 50 10 8. Lenders may also require guaranties from others (e.g., key managers or stakeholders) based on credit or risk factors.

  • Documentation: Guarantors must submit a personal financial statement, detailing assets and liabilities, except for 7(a) loans or 504 projects of $500,000 or less.

Spousal Guaranty

Spousal guaranties apply when ownership involves married couples:

  • If a spouse owns less than 20% but the combined ownership of both spouses and their minor children reaches or exceeds 20%, the spouse must provide a full personal guaranty.

  • Non-Owner Spouses: Required to sign collateral documents, with their guaranty limited to their interest in jointly held assets (e.g., real estate).

Collateral and Guaranty Requirements

Guaranties may be secured (backed by assets) or unsecured, but must meet SBA collateral standards:

  • Loans Over $500,000: If the loan isn’t fully collateralized by business fixed assets or the business’s equity value, guarantors with 25% or more equity in personal real estate must pledge it, per SBA rules.

Limited Guaranty

For owners with less than 20% ownership, lenders may request a limited guaranty (covering a fixed amount or specific assets) or a full guaranty, depending on the loan’s risk profile.

  • Use Case: Common in complex deals, like acquisitions, where additional guarantors strengthen the application.

Supplemental Guarantor

A supplemental guarantor is an individual or entity required by the lender (not mandated by SBA rules) to provide a guaranty due to risk concerns.

  • Use Case: Common when the primary guarantor’s financial strength is insufficient, such as in startups with limited net worth.

Corporate, Trust, and Other Guaranties

Entities with 20% or more ownership in the borrowing business, such as corporations or trusts, must provide a full, unrestricted guaranty.

  • Trusts: For revocable or irrevocable trusts, the trust provides the guaranty, signed by the trustee with required certifications. For revocable trusts, the trustor must also guarantee the loan.

  • Disclosure: Full ownership details of all individuals within the entity (e.g., partners or shareholders) are required, ensuring transparency.

LoanBox Loanology provides independent insights into small business lending based on what we know can be accomplished with most LoanBox lenders. However, there may be some policy, perspective, or viewpoint we share which may not reflect those of all lenders on our platform, as each brings unique policies. LoanBox lenders brings diverse policies and perspectives so not all lenders will be able to assist or even agree with all of the tips, strategies, articles, guides, and insights we provide for small business owner borrowers. Lenders are not responsible, liable or obligated for the content or advice provided in Loanology or on LoanBox.com. For specific guidance, use the search bar or just contact us directly and speak to a LoanBox Advisor.