ADVISOR LOANOLOGY
Guaranties & Guarantors
An Unlimited Personal Guaranty is where the borrower/guarantor is guarantying the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting on the loan.
Owners having 20% or more of the borrowing business must provide a personal guaranty for both conventional and SBA loans. Lenders may require other individuals to guarantee the loan as well. The guaranty by owners of less than 20% may be limited or full. All individuals guaranteeing the loan must provide a personal financial statement.
Guaranty may be secured or unsecured and for SBA loans there are specific requirements which must be met. For loans over $350,000 if the loan is not fully collateralized by fixed assets or by the equity value of your practice, available equity in personal real estate must be pledged if you have 25% or more equity. HELOC balances count against the measurement of your equity reducing your total equity ownership percentage.
Individual Guaranties:
20%+ Ownership: Owners holding 20% or more of the applicant entity must provide a full, unconditional guaranty, covering the loan balance, interest, and collection costs for 7(a) loans.
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.
Corporate, Trust, and Other Guaranties:
Entity Ownership: Entities (e.g., corporations, LLCs) 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 For revocable trusts, the trustor (creator) must also personally guarantee.
Example: A trust owning 30% of a business guarantees the loan, with the trustee and trustor (if revocable) signing.
SBA’s 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.
Example: An owner reduces their stake from 30% to 10% three months before applying for a loan; they must guarantee unless they fully divested all ties before the application.
Remaining Partner Guaranties
Conventional Equity Buy-Ins
(Equity Buy-in Loans)
In conventional loans for equity buy-ins any remaining partner with 20% or more ownership must participate in a corporate guaranty, grantor agreement, or sign a guarantor note, placing a lien on the entire business entity. Each conventional lender in the space varies in their requirements.
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).
Example: If a borrower owns 15% and their spouse owns 5%, the spouse provides a full guaranty due to the combined 20% stake.
Supplemental Guarantors:
Definition: Non-owners or owners with less than 20% required by the lender to guarantee due to credit or risk factors (e.g., a key manager critical to operations).
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.
20% and Over Equity Partner(s)
(SBA Equity Buy-in Loan)
For SBA loans involving equity buy-ins any partner with 20% or more ownership is required to provide an unlimited personal guaranty, and be under guarantor collateral requirements, including personal property collateral.
Under 20% Equity Partner(s)
(SBA Equity Buy-in Loan)
Post-sale, owners with 20%+ equity (including the seller, if retaining equity) must provide a personal guaranty. But no as of June 1 2025 the SBA is requiring any equity partners retaining less than 20% to also guarantee the loan for 2 years post-disbursement. For ESOP transactions, sellers retaining partial ownership must provide a full, unlimited guaranty.