Understanding Spousal Guaranty Requirements for SBA Loans

Understanding Spousal Guaranty Requirements for SBA Loans

As a small business owner, you might be wondering about how your business loan will affect your spouse and shared assets. We're breaking down the essentials of spousal guaranties and the recent changes from the SBA you need to know.

A spousal guaranty is a legal commitment where a spouse agrees to personally guarantee the repayment of the loan. If your business can't repay, the lender can go after your spouse’s personal assets. Recent updates in the SBA's guidelines have expanded the scenarios where a spouse may need to step in as a guarantor. Here are the key factors that will determine if a spousal guaranty is necessary for your SBA loan:

Spousal Guaranty Rule: If your spouse owns any percentage of the business, and their equity combined with yours equals 20% or more, your spouse will also need to guarantee the loan. For example, if you hold 19% equity and your spouse has 1%, both of you must be guarantors.

Community Property or Spousal Interest in Property: If your spouse has a community property interest in any assets securing the SBA loan, they may be required to guarantee it. This stems from community property laws that give spouses equal ownership in assets acquired during marriage.

Influence Over Business Operations: Even if your spouse doesn’t own a stake in the business, they might still need to be a guarantor if they significantly influence business operations. For instance, if they handle finances or make key decisions, the SBA could view them as a de facto owner.

Prior Bankruptcy or Credit Issues: If your spouse has a history of bankruptcy or credit challenges, the SBA may require them as a guarantor. This is because the agency takes a spouse’s creditworthiness into account when assessing loan risk, and a poor credit history could raise red flags.

Limited or No Community Property Laws: In states where community property laws are minimal or non-existent, spouses might still need to guarantee loans if they have a significant financial stake in the business or have contributed to its success. If your spouse has invested funds or provided essential skills, their guaranty may be required.

Borderline Approval Scenario: For borrowers on the edge of loan approval, having a spouse with income as a guarantor can help tip the scales in your favor with lenders.

Understanding these requirements can help you navigate the SBA loan landscape more effectively. Be sure to discuss your situation with your spouse and consult your financial advisor to make informed decisions that protect both your business and personal finances.

This article is authored by Darin Manis, founder of LoanBox.