Troubleshooting External User Sharing Error
A client of mine tried sharing a file with an external user on an external site and got the error message "Your organization's policies don't allow you to share with these users. Please contact your IT department for help". In this particular case, they normally can share documents externally but they couldn't when it was with this user.
CAUSE AND SOLUTION
The cause of the issue is either because external sharing is turned off for this site collection or it can even be that external sharing is turned on for the site collection but it doesn't allow for new guests. How you can check on this is by doing the following:
Click on Admin in the app launcher
Click on SharePoint to get to the SharePoint Admin Center
Select your site and click on Sharing
From there you can either select New and existing guests or Existing guests only (if the guest is added in your directory)
IF EXTERNAL SHARING IS DISABLED
If you are trying to allow for external sharing and the settings are greyed out on the site this means you have to allow for sharing at the tenant level.
Go to the SharePoint Admin Center and select Sharing: https://[TenantNAME]-admin.sharepoint.com/_layouts/15/online/AdminHome.aspx#/sharing
Set your external sharing setting to what you feel comfortable with. If you enable external sharing it won't change it for every site. You would have to go into your site and set external sharing after you change this setting.