October 17, 2019

The 20% Rule: Who Must Serve as Guarantor on an SBA Loan

It is common for businesses to have multiple owners, and for many of those owners to serve as a “silent” partner or other passive role, regardless of the size of the share of ownership. Many owners believe they can take that same passive, no involvement approach in the SBA loan process as well. However, in the eyes of the SBA, any owner with 20% or more interest in the company must serve as a guarantor, including providing all required personal and financial documents and undergo the same character scrutiny as any active partner.

The specific language that details this rule is found in the SOP 50 10 5(K) Subpart B on page 124, Section III.D.f.1. In it the document states that, “Each holder of an ownership interest constituting at least 20% of either the EPC or the OC must guarantee the loan.” This rule doesn’t only apply to individual owners, as family members and Trusts are subject to additional rules.

Ownership Among Members of Same Household

The SBA views ownership by related members of the same household as cumulative. Meaning, if each individual’s membership when added together brings their total interest to 20%, they are considered subject to the 20% rule. For example, if a husband and wife each own 10%, together their interest is 20%. Or if a father owns 15% and a son owns 5% and they both reside in the same household; they’re interests are combined, and they must both serve as guarantors and provide all required documentation.

Trusts as Owners

If 20% or more interest in a company is held by a Trust, the Trustee will serve as guarantor on its behalf. If an EPC is owned either partially or fully by a Trust, there are additional considerations. Namely, eligibility status is impacted by the Trustor and donors, and guarantees must be made that no alterations will be made to the trust while the loan is in effect. 

In our experience this is a sticking point for many borrowers who have owners who wish to remain largely uninvolved with the business. Unfortunately, it is mandatory and can stop an SBA loan in its tracks. It always helps to identify ownership structure early on and to prepare borrowers who will need to approach their partners and gain their participation in the process. Each guarantor will need to provide all financial documentation including tax returns and a Personal Financial Statement and must pass all of the character considerations related to Form 1919, including not having any active issues with the law or a history of fraud or other financial crimes.   

If you have questions about the ownership structure of a business and its impact on eligibility, you may contact us

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About Ken Olson, Regional Manager

Ken Olson has over 45 years of SBA experience. Ken began his career with the U.S. Small Business Administration, managing SBA lending programs, economic development, and marketing. Since 2006, Ken has served as a consultant helping financial institutions add SBA loans to their product offerings. At Capital Growth Solutions, Ken helps onboard lenders who wish to leverage an LSP for the SBA lending needs as well as serving as an educational resource to staff and partners.

  1. Christopher T McIntosh October 30, 2019 at 10:30 AM Reply

    If a company has an ownership structure of founder = 75%, president= 13%, and multiple employees own 12%, and the founder draws no salary and the president’s salary is $110,000, would the president at 13% ownership need to guarantee the loan?

    • Christopher,

      The SBA would generally not require the President with 13% ownership to guaranty the loan. However, as a key employee the President would need to submit a resume and go through the character check which includes submitting the SBA form 1919.Now, the bank may still require that the President guaranty the loan, but there are many factors that are considered and so these are general guidelines. Each situation is unique and evaluated on a case by case basis. It comes down to a number of factors, including the role in the company, succession planning and key man insurance, operational and revenue factors, etc. It is always best to discuss with your lender and lender service provider, who can evaluate your situation and tell you specifically what will need to be provided.

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