Best Practices: Who Must Guarantee an SBA Loan?

Generally speaking, every SBA 7(a) loan must be guaranteed by at least one individual or entity. The SBA has set out different criteria and requirements for different types of guarantors. SBA Form 148 (Unconditional Guarantee) and SBA Form 148L (Limited Guarantee) are the standard documents for providing a guaranty on an SBA loan. The SBA does not require these documents to be used and lenders can utilize their own guaranty agreement so long as the agreement is “equivalent” to the terms found in the SBA’s Forms.

All individuals owning 20% or more of a borrower entity are required to provide an unlimited full guaranty. If no one individual or entity owns at least 20% of the borrower entity, at least one of the owners must provide a full unconditional guaranty.  If a person or entity owns 20% or more of a borrower entity six months prior to the date of the loan application, then they will continue to be subject to SBA’s guaranty requirements even if they reduce their ownership prior to closing the loan.  The only exception to this six-month rule is for ownership interests that have been divested entirely. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the borrower entity (and any associated Eligible Passive Company) in any capacity. If an individual has executed the Note as a borrower in an individual capacity, however, that person does not also have to execute a personal guaranty.

All entities owning at least 20% of a borrower entity are also required to provide an unlimited full guaranty. If the entity is a trust (revocable or irrevocable), the trust must guarantee the loan and the trustee must execute the guaranty on behalf of the trust. If the trust is revocable, the trustor must also personally guarantee the loan. Lenders are required to obtain financial statements for all individuals and entities guaranteeing the loan in order to determine the assets available to support each guaranty. In certain circumstances, it may be appropriate to require an individual or entity to provide a full or limited guaranty regardless of percentage ownership interest in the borrower entity. For example, lenders may consider requiring a guaranty from individuals who manage the day-to-day operations of the business or individuals or entities with an ownership interest in collateral.

SBA also outlines rules indicating when a guaranty is required of a spouse. Each spouse owning less than 20% of the borrower entity must personally guarantee the loan in full when the combined ownership interest of both spouses and any minor children is at least 20%. A spouse may still be required to provide at least a limited guaranty even if they have no ownership interest in the borrower entity. Most commonly, a spouse may be required to provide a limited guaranty with regard to jointly held collateral property. In this case, the spouse will also need to sign all collateral documentation, including any mortgages or deeds of trust taken as collateral. Lenders may use SBA Form 148L, or a comparable form, for spouses or other individuals providing a limited guaranty. When doing so, the limited guaranty must specify exactly what the guaranty is limited to as set forth below:

• Balance Reduction – The guaranty is of all amounts owing under the Note, and will continue until the total of all amounts owing under the Note is reduced below a set dollar amount.
• Principal Reduction – The guaranty is of all amounts owing under the Note, and will continue until the outstanding principal balance of the Note is reduced below a set dollar amount.
• Maximum Liability – The guaranty is limited to the guarantor’s payment of a set dollar amount. Except for payments that reduce the loan balance below the stated amount, only payments by the guarantor are credited against the guarantor’s liability.
• Percentage – The guaranty is limited to the guarantor’s payment of a set percentage of all amounts owing under the Note at the time demand is first made on the guarantor, plus the same percentage of any accrued interest and other costs charged to the Note after demand, until the guarantor fully performs the guaranty.
• Time – The guarantor is responsible for all obligations due under the Note during the stated time period.
• Collateral/Recourse – The guaranty is limited to the amount that lender obtains from specific collateral pledged by the guarantor. Although the guarantor is not personally liable on the loan, this type of guaranty will ensure that the waivers, consent, and notice provisions of the guaranty are applicable to such persons.
• Community Property/Spousal Limitation – The guaranty is limited to the guarantor’s community property or spousal interest in collateral pledged to secure the guaranty.

As mentioned above, while some individuals and entities may not be required to provide a guaranty per SBA rules, it may still be prudent for Lenders to require additional guarantors in certain circumstances.  By understanding and complying with SBA’s guarantor/guaranty requirements, Lenders can avoid costly mistakes that could impact their SBA loan guaranty.  For questions regarding SBA’s guarantor requirements, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.