SBA 7a Collateral requirements.

There are several common misconceptions about collateral requirements and SBA loans. In fact, I frequently talk to borrowers (and bankers) who falsely assume that the SBA is going to take a lien on everything they own.

The reality is that the SBA wants enough collateral to secure the loan if it’s available. Contrary to popular belief, if there isn’t enough collateral available to secure the loan and the bank feels comfortable with the loan request, they can still make the loan.

To demonstrate, let’s say you have a Dentist that wants to buy a business for $1,000,000 that has $250,000 worth of equipment collateral. The rest is goodwill assuming the borrower does not have equity in a home that could be pledged. In this scenario, the loan is eligible with only the $250,000 of equipment. Conversely, if the borrower had a home worth $1,500,000 owned free and clear, the SBA would require that the bank take a lien on the house.

In the recent changes made to the SOP, the Small Business Administration now states that loans under $500,000 can use the same collateral guidelines as commercial loans. This means that if your bank’s lending policy only requires taking business assets and does not require taking a personal residence, then you can do the same for your SBA loans.

Article written by: Brian Carlson