This is easy... the thing is, in final fantasy, anything unusual such as giant swords, talking dogs, and wild hairdo's are all normal. So Cloud probably didn't need to sneak his sword past the guards; they guards probably said, "Nice big ass sword dude," then let him through.

Aerith: Cloud, how are we going to get into Don's Mansion? You have a huge ass sword that is pretty conspicuous.
Cloud: Hmm......I know! (Waves arms mystically) Ooogitty boogitty shamoogitty! (Buster Sword shrinks down to 3 inches. Cloud then sticks the sword in his pocket.)
Aerith: ...............Wtf did you just do?
Cloud: I casted Mini on it, duh! (Cloud and Aerith walk up to guard. Guard greets them.)
Guard: Damn, your friend is hot, too! (He spots Clouds dress, which is sticking out slightly from the sword.) Umm.......ok....Your friend is a she, right?
Aerith: (Looks at what the Guard saw, and began to blush) Oh, that......it's a banana for Don. You know, as a flattery gesture.
Guard: .......
Aerith: I swear! (Cloud brushes his hair in cheesy animation, and nods.)
Guard: Ok....if you say so.

Yeah, that's how it went down.

I'm surprised no-one has brought out the possibility of it working via hammerspace yet.

"A similar concept is hammerspace, the physical dimension that characters reach into to pull out very large mallets, or other objects, to hit other characters on the head. The main difference is that "hammerspace" is used in reference to animation and other fiction in which the viewer or reader does not participate."

I guess no-one did, oh well