Error When Sharing with Guest Users

Scenario:  When you have set up external sharing with the below-mentioned option in SharePoint Online:

Issue/ Error: The users who are members of the security group you have added in the external sharing option, as shown above, receive the below error when sharing externally:

Cause: If you are using an M365 cloud-only group so it will not work due to a limitation by Microsoft as M365 Groups are not supported for the purpose in question.

For more details, refer to the below Microsoft article:

https://docs.microsoft.com/en-us/sharepoint/manage-security-groups 

Resolution: You can use a Cloud-only Security Group or you can also use an On-Premises Group Synced to M365 for the purpose in question.