Best Practices: Requirements for SBA Guarantees

Pursuant to 13 CFR § 120.160(a), all SBA 7(a) loans must be guaranteed by at least one person or entity. Generally, guarantees are required of any individual or entity who owns 20% or more of a borrower entity. If no individual or entity owns at least 20% of a borrower entity, then at least one owner of that entity must unconditionally guaranty the loan.

Personal Guarantees

Individuals owning at least 20% of a borrower entity must provide an unlimited personal guaranty on SBA loans. For 7(a) loans, Lenders have the option of using the SBA Form 148 or their own equivalent guaranty form. SBA requires Lenders to obtain personal financial statements from all individuals guaranteeing a loan, unless the Lender credit scores the guarantor for 7(a) or 504 loans $500,000 or less.

If a Lender requires an individual to provide a limited guaranty, they have the option of using the SBA Form 148L or an equivalent form. A limited guaranty must specify a limitation option 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.

Supplemental Guarantors

            SBA defines a supplemental guarantor under the 7(a) loan program as an additional guarantor not required by the SBA Loan Program. Lenders are not required to obtain personal financial statements from supplemental guarantors.

Guaranty of a Spouse

Per SBA rules, each spouse owning less than 20% of a borrower entity must personally guarantee the loan in full when the combined ownership interest of both spouses and minor children is 20% or more. Non-owner spouses are required to sign appropriate documentation securing co-owned collateral such as a mortgage for the spouses’ jointly owned residence. In instances where a spouse co-owns collateral property but is not an owner of the borrower entity, it is recommended (but not required by SBA) that Lenders obtain a limited guaranty.

Corporate Guarantees and Trust Guarantees

All entities that own at least 20% of a borrower entity are required to provide an unlimited full guaranty. Trusts that own at least 20% of a borrower entity are also required to provide an unlimited full guaranty. Both revocable and irrevocable trusts can guaranty a loan, however the trustee(s) must execute the guaranty on behalf of the trust. When the trust is revocable, the trustee(s) must also personally guaranty the loan.

Substitution of Personal and/or Corporate Guaranty Liability

            The purpose of SBA’s guaranty requirements is to reduce the risk of loss to taxpayers under the SBA loan programs. In light of this objective, SBA will allow third-party individuals or entities to assume the liability of a personal or corporate guaranty, as applicable, for the guaranty of the individuals and/or entities that would otherwise be required to make a personal or corporate guaranty under SOP guidelines. The substitute guarantor is required to have the same or greater value and the personal or corporate guaranty liability agreement or transfer agreement must be submitted to SBA with the executed loan package. Further, Lenders must identify both the substitute guarantor and the guarantor being substituted in the E-Tran terms and conditions.

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 guarantee 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.