Guaranties are typically required on SBA loans, and while it is generally clear who must provide a full unconditional guaranty, it is more of a grey area when it comes to who must sign a limited guaranty for a particular transaction. Lenders must be cognizant of when limited guaranties may be required in order to make sure the SBA guaranty is protected.
The SBA makes it very clear in the SOP that any 20% or more owner of an Applicant business must provide a full unconditional guaranty. The exception to this rule is when an individual has signed the Note in its capacity as a Borrower. Often, the applicant owner’s spouse or another party will not be a 20% owner of the Applicant, but will have some type of interest in the Applicant, be critical to the Applicant’s operations, or have some collateral associated with the prospective loan that will require the Lender to consider whether such party should provide some type of guaranty. In this situation, the Lender may consider including the individual or entity as a limited guarantor on the loan.
There are several different types of payment limitations that are possible if a lender is using the SBA Form 148L, and depending on the circumstances the Lender must choose one of the following limitations:
- Balance Reduction- the guarantee is for the full amount of the Note and any interest, charges, or other expenses that may be added to the Note. The guarantee remains in force until the entire obligation has been reduced to the stated amount.
- Principal Reduction- The guarantee is in force until the principal balance has been reduced to the stated amount.
- Maximum Liability- limits the Guarantor’s liability to the stated amount or all amounts owing on the Note, whichever is less. Except for payments that reduce the loan balance below the stated amount, only payments by the Guarantor are credited against Guarantor’s liability.
- Percentage- Guarantor must pay the stated percentage of all amounts owing on the Note when demand is made on the Guarantor.
- Time- Guarantor is responsible for all obligations due under the Note during the stated time period.
- Collateral/Recourse- used for every person who pledges collateral but will not be personally liable. This will ensure that the waivers, consent, and notice provisions of the Guarantee are applicable to such persons.
- Community Property/Spousal Limitation- This option is for the situation when a spouse could assert that a community property or spousal interest in property pledged to secure the loan is not subject to enforced collection.
Lenders should note that some states have specific exemptions, waivers, and other legal remedies to protect property rights of individuals, and in addition to guaranties, Lenders must also make sure to comply with any state rules or laws that could jeopardize the ability to enforce its rights against any collateral.
While this can be a sensitive discussion with a proposed Applicant, the Lender must keep in mind that not obtaining a guaranty from a party that SBA deems necessary, for credit or other reasons, can potentially impact its loan and result in a repair or denial of the SBA guaranty, and that needs to be the ultimate consideration when deciding who needs to provide a guaranty.
For questions regarding SBA compliance issues, contact the attorneys at Starfield & Smith at 215-542-7070 or visit our website at www.starfieldsmith.com.