Your silent partner will not sign a guarantee

The refusal is usually reasonable from the partner's side. They put in money, they do not run the business, and they were never told that passivity has a price at the bank. Explaining that price clearly is usually more productive than arguing about it.

The threshold, and what it actually says

For SBA 7(a) loans, 13 CFR 120.160 provides that "holders of at least a 20 percent ownership interest generally must guarantee the loan", and that SBA or a delegated lender may also require guarantees from other individuals or entities regardless of ownership percentage where it considers them necessary. Both halves matter. The 20 percent line is not a safe harbour; it is a floor below which a guarantee is not automatic.

The same threshold appears in the eligible passive company rules at 13 CFR 120.111, where "each holder of an ownership interest constituting at least 20 percent of either the Eligible Passive Company or the Operating Company must guarantee the loan".

Conventional bank and non-bank lenders are not bound by these rules. They set policy, and policies vary widely — some require every owner above 20 percent, some above 25, some only the controlling owner, some only whoever can actually repay. Ask the specific question early: what is your ownership threshold for guarantors, and will you take a limited guarantee from a passive holder?

The dilution arithmetic

If the partner sits just above the threshold, arithmetic can move them below it.

Issue new units to yourself and the partner's percentage falls without anything being taken from them. Solve for the smallest whole number of new units where 22 ÷ (100 + x) falls below 20 percent:

• 10 new units: 22 ÷ 110 = 20.00 percent. Not below.
• 11 new units: 22 ÷ 111 = 19.82 percent. Below.

Your holding moves from 78.0 percent to 89 ÷ 111 = 80.2 percent. The partner's economic position is diluted by about 2.2 points of the company.

Three warnings before anyone does this:

1. The partner has to agree, and usually has contractual protection against dilution. Read the operating agreement's anti-dilution and pre-emptive rights provisions before you propose anything.
2. Consideration matters. Units issued for nothing, immediately before a loan application, to move a guarantor below a regulatory threshold, is a fact pattern a lender will look at. Do it for a real reason, with real consideration, documented, and not the week before you apply.
3. It may not work anyway. The regulation lets SBA require a guarantee from anyone it deems necessary. A holder at 19.8 percent who was at 22 percent last month is exactly the person a credit officer will ask about.

The alternatives, in the order to try them

1. Ask for a limited guarantee. Guarantees are not binary. A guarantee capped at the partner's percentage of the debt, or at a fixed dollar amount, or limited to the balance at a point in time, is a real instrument. A passive holder at 22 percent guaranteeing 22 percent of a 300,000 loan is guaranteeing 66,000, which is a conversation you can have with them.
2. Ask for a validity guarantee instead of a payment guarantee. On receivables-based facilities, a validity guarantee commits the signer to the truthfulness of the collateral rather than to repayment of the debt. Some passive holders will sign that when they will not sign a payment guarantee.
3. Offer collateral in place of the guarantee. Additional security sometimes buys a guarantor release that cash flow alone will not.
4. Take a product where the constraint binds differently. Equipment financing secured by the asset, or invoice factoring underwritten primarily on your customers' credit, may not require every owner to sign.
5. Buy the partner out. If the refusal is permanent and the partner's stake is the thing standing between you and the capital you need to grow, the buyout is a financeable transaction in its own right — and it removes the problem rather than working around it.

What to put to the partner

Passive holders often refuse because nobody explained the actual exposure. Put the numbers in front of them.

• The amount being borrowed and the amortisation.
• The cash flow coverage. If the business covers the payment 1.5 times, say so and show the calculation.
• What the guarantee would actually be called on — not the loan amount, but the balance at default plus default interest plus collection costs, which is the number that surprises people.
• What you are offering in return. A fee, a preferential distribution, a matching guarantee from you on their other exposure, an agreed cap. Guarantees are worth something and it is reasonable to pay for one.

If the partner still refuses, that is information. A passive investor unwilling to stand behind the business at any level has told you something about how they read the risk, and it is worth asking yourself whether they are seeing something you are not.

What to have ready

The current capitalisation table with dates of every issuance and transfer. The operating agreement with the transfer, dilution and pre-emptive rights sections flagged. A written note of what each owner contributed and when. Lenders ask for all three, and an inconsistency between the cap table and the operating agreement will hold the file for weeks.

What to refuse

Refuse to backdate or restructure ownership to defeat a guarantee requirement. Every guarantee document contains representations about ownership, and a false one converts a commercial dispute into something much worse.

Refuse to sign a guarantee on behalf of a partner under a power of attorney unless the document explicitly authorises it and the lender has confirmed in writing it will accept it. And refuse an offer that requires the partner's guarantee without telling you whether a limited one would do — that question has never once been answered before it was asked.