Who must guarantee an SBA 7(a) Loan?

The U.S. Small Business Administration's (the SBA) Standard Operating Procedures (SOP) 50 10 7 requires every 7(a) loan "must be guaranteed by at least one individual or entity." So who is required to guarantee a 7(a) loan?

Each individual or entity that owns 20% or more of the equity in a borrowing entity must provide an unconditional guarantee of the loan. If no individual or entity owns 20% or more of the borrower entity, at least one owner will be required to provide an unconditional guarantee. Something to note here is that spouses' and minor children's ownership percentages are combined when making this determination. Therefore, if one spouse owns 10% and the other owns 20% of the borrowing entity, both spouses will be required to provide an unconditional guarantee of the loan (minor children are not required to be guarantors). The only exception to this 20% guarantee requirement is when an Employee Stock Option Plan (ESOP) or 401(k) owns 20% or more of the equity in the Borrower entity since there are other federal laws that prohibit the ESOPs or 401(k) plans from guaranteeing debt.

If you are thinking about divesting a portion of your ownership in the borrower entity to avoid providing this guarantee, think again. There is a 6-month lookback period that will capture any individuals or entities that owned 20% or more of the borrower entity during that period. An exception to this rule exists if an individual or entity divests its entire ownership interest prior to the date of the loan application. Note that the SOP defines complete divestiture as "divestiture of all ownership and any relationship with the" Borrower entity "in any capacity, including being an employee."

Even if an individual or entity is not required to provide an unconditional guarantee under the 20% rule discussed above, they still may be required to provide a limited guarantee. This commonly occurs when an individual or entity is a co-owner of real property that is serving as collateral for the loan. In this case, they will provide a guarantee limited to their ownership interest in this real property.

There are other instances where limited guarantees are required; however, they are fairly rare and generally apply to very unique and specific circumstances.  Examples of such limitations include: (1) Balance Reduction - the guarantee is only effective until the loan balance reaches a certain set amount, at which point the guarantor is released from its guarantee; (2) Maximum Liability - the guarantor is only liable for a set amount (which will be less than the full loan amount); (3) Percentage - the guarantor is only liable for a certain percentage of the full loan amount; (4) Time - the guarantor is only liable for a specific "Guarantee Period" set forth in the limited guarantee; and (5) Community Property or Spousal Interest - the guarantee is limited to the guarantor's community property interest or spousal interest in any collateral pledged to secure the loan.

The SBA has issued its own guaranty forms (Form 148 for an unconditional guarantee and Form 148L for a limited guarantee) that lenders may, but are not required to, utilize. Lenders may choose to use their own form of guaranty so long as it is substantially equivalent to the terms of the corresponding SBA document.

The SOP dictates who must guarantee an SBA 7(a) loan. However, it is important to keep in mind that the SOP sets out just the minimum requirements that lenders must comply with to be eligible for the 7(a) loan guaranty.  Lenders may require guaranties from additional persons or entities that are essential to the operation of the borrower entity and should be sure that the loan complies with their internal lending procedures. For more information on the SOP 50 10 7 and who must guarantee an SBA 7(a) loan, please contact Richard Boswinkle or Madeline Morgan.