New SBA Rules: Stricter Guaranty Requirements
New SBA Rules: Stricter Guaranty Requirements
Per the SBA SOP 50 10 8 (effective June 1, 2025) the SBA has updated their guarantor rules for the specific individuals and entities who must provide guaranties based on ownership and other factors. Let’s go through what the current requirements now look like.
What Is a Guarantor?
A guarantor is an individual or entity that pledges to repay the loan if the borrower defaults, reducing lender risk. SBA loans require at least one guarantor, typically owners with 20% equity, to provide a full, unconditional guaranty. The types of guarantors span individual owners, spouses, corporations, trusts, or supplemental guarantors (non-owners added for credit strength).
SBA Guaranty Requirements
Per SOP 50 10 8, SBA 7(a) and 504 loans mandate guaranties from owners and related parties to ensure accountability. These rules apply to all loan types, including change of ownership loans for business acquisitions or partner buyouts.
Individual Guaranties:
20%+ Ownership: Owners holding 20% or more of the applicant entity (or Eligible Passive Company, EPC) must provide a full, unconditional guaranty, covering the loan balance, interest, and collection costs.
Disclosure: If ownership is held by a corporation, partnership, or other entity, all individuals with 20%+ direct or indirect ownership in that entity must be disclosed and provide guaranties. For example, if a corporation owns 50% of the applicant, individuals owning 20%+ of the corporation must guarantee.
Personal Financial Statement (PFS): Required for all individual guarantors, except for supplemental guarantors, to assess their ability to support the guaranty.
Additional Guarantors: Lenders may require guaranties from individuals or entities with less than 20% ownership for credit or risk factors (e.g., key managers, affiliates), either full or limited.
Spousal Guaranties:
Combined Ownership: If a spouse owns less than 20% but the combined ownership of both spouses and their minor children reaches 20% or more, the spouse must provide a full, unconditional personal guaranty.
Non-Owner Spouses: Spouses not owning the applicant entity must sign collateral documents (e.g., mortgages) for jointly held assets. Their guaranty is limited to their interest in the collateral (e.g., 50% of a jointly owned property).
Corporate, Trust, and Other Guaranties:
Entity Ownership: Entities with 20%+ direct or indirect ownership in the applicant must provide a full, unconditional guaranty, signed by an authorized representative.
Trusts: For revocable or irrevocable trusts owning 20%+, the trust provides a guaranty, with the trustee signing and providing certifications (e.g., trust agreement compliance with SOP Section A, Chapter 2, Paragraph B.1.b). For revocable trusts, the trustor (creator) must also personally guarantee.
Change of Ownership and Six-Month Look-back:
Six-Month Rule: Individuals who owned 20% or more within six months prior to the loan application date must provide a full guaranty, even if their ownership dropped below 20%, unless they completely divested before the application.
Complete Divestiture: Requires relinquishing all ownership and severing all ties (e.g., employment, management, consulting) with the applicant for the life of the 7(a) or 504 loan.
Partial Change of Ownership: For partial buyouts, selling owners retaining less than 20% equity post-sale must provide a full guaranty for 2 years after loan disbursement. For ESOP transactions, sellers retaining partial ownership must provide a full, unlimited guaranty regardless of percentage.
Supplemental Guarantors:
Definition: Non-owners or owners with less than 20% required by the lender to guarantee due to credit or risk factors not mandated by SBA rules.
Scope: May provide full or limited guaranties (e.g., capped at a specific amount or asset.
Example: A partner with 5% ownership provides a limited guaranty on specific assets to strengthen a loan application.
Can an Owner Reduce Equity to Avoid an SBA Guaranty?
No, reducing ownership below 20% within six months of the loan application does not exempt guaranty requirements. Per SOP 50 10 8, individuals who held 20% or more in the past six months must provide a full, unconditional guaranty unless they completely divested—meaning they sold all ownership and severed all ties (e.g., employment, management, consulting) with the applicant before the application date. For partial changes of ownership, owners retaining less than 20% equity must guarantee for 2 years post-disbursement.
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