What Is an SBA Loan Guaranty?

In a contract, a guaranty is given as security for the execution, completion, or existence of the loan contract. Common usages of this provision include loans that require a co-signer and loans that are guaranteed by an outside entity, such as a private party,

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The guaranty acts as a promise whereby one person agrees to assume the responsibility of ensuring payment or fulfillment of another person's debts or obligations. The most common reason for a lender to require a guaranty is when the borrower has either a bad credit history or no credit history.

The Small Business Administration (SBA) helps small business owners who would otherwise not be able to qualify for a loan secure the funding they need. With an SBA loan, the government guaranties a percentage (such as 80 percent) of the loan, thus substantially lowering the risk to the lender.

A personal guaranty involves a third party using their assets to guaranty the loan in the event that the borrower does not fulfill the promise to repay the loan as specified in the loan contract. Assets that can be used to secure a guaranty include:

• Cash deposits or insurance
• Real estate equity
• Stocks, bonds, and other securities
• Other valuables such as paintings, jewelry, coin collections, antiques, classic cars

If you find yourself in the position of having to secure a guaranty for a loan, there are several methods you can employ to lessen the burden: You can offer a security deposit in lieu of the guaranty; ask for a guaranty for a limited period of time; or ask to have the guarantor cover a lesser percentage of the loan, such as 50 percent instead of the full amount.

Visit the AllBusiness.com Forms and Agreements section to see a sample Guaranty Form.