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SBA 504 Q&A: Substitution of a Guarantor

Jan 2014

Q: Can a guarantor be substituted on a Small Business Administration (SBA) 504 loan after the debenture has funded?

A: Servicing requests on loans in regular servicing status that involve substitution of guarantors are subject to the loan program requirements in effect at the time the loan was made, which are located in the SBA's Standard Operating Procedures (SOP) 50 10. This includes, for example, those pertaining to appraisals, environmental investigations and eligibility requirements.

Servicing requests should be accompanied by the supporting documents that a prudent lender would need to make an informed decision. Examples of documentation needed are as follows:

1. A current financial statement and federal income tax returns for the past two years should be required from all of the guarantors -- not just the borrower -- when a complete analysis of each obligor's repayment ability is necessary.

2. Current financial statement and Federal income tax returns for the last two years for the operating company.

3. The written consent to any material change in the terms and conditions of the loan must be obtained from each obligor in order to protect the ability to recover from them in the event of default.

4. Any other documentation prudent and necessary to complete the analysis required by the SBA.

Requests to allow substitution of a guarantor are reviewed, analyzed and implemented pursuant to the following guidelines:

a. The financial strength of the proposed substitute guarantor should be equal to or greater than the financial strength of the existing obligor;

b. Neither the release of the existing guarantor nor the substitution for the proposed guarantor should adversely impact the operation of the business; and

c. Substitution of the proposed guarantor may be conditioned on retention of the original guarantor for a transitional period (e.g., two years) during which time there must be no material adverse change in the financial condition of the business.

The less time the loan has been in the funded portfolio, the more stringent the SBA is going to look at the request to ensure the new request does not affect applicant eligibility. As always, final approval of the request is at the sole discretion of the SBA.

If you have a question you'd like our SBA 504 loan experts to answer, email us at info@ffcfc.com or call 850.681.3601 or toll-free at 888.320.5504. Website: www.ffcfc.com.