SBA Loan Collateral Requirements

The SBA helps business owners secure financing.

The Small Business Administration, SBA, is a government entity that provides loan guarantees and grants to small businesses. Many banks will not consider new or small businesses for a loan, since these companies have more risk or have no established track record of financial ability to repay the loan. Small business owners can obtain loans backed by the SBA, but need to share the payback risk with the lender by pledging some type of collateral to secure the loan.

SBA Loans

An SBA loan is a type of financing provided to small business owners who may not be able to find other loan sources at a reasonable rate. Private lenders provide the loans, and the Small Business Administration, SBA, guarantees them. The SBA does not actually lend funds directly to consumers.

Collateral Defined

Collateral is a term used to describe a person's assets that are used to secure some type of credit, such as a loan. For example, individuals who get a mortgage loan from a bank use the home they buy as collateral for the loan. If the home owner defaults on his mortgage, the bank may seize the house to repay the loan.

Collateral Details

Collateral requirements for an SBA loan vary quite a bit, depending on the type of loan and its purpose. Loans with a higher default risk will require a substantial amount of collateral. Each intermediary lender has its own set of credit and lending requirements. Generally, lenders will require a personal guarantee and some form of collateral to secure an SBA loan. Assets pledged for collateral may be the company owner's personal assets or business assets. If a person has valuable assets, a lender will require an adequate level of collateral to secure any SBA loan. However, the SBA will not generally decline a loan if the only issue is lack of adequate collateral. A strong, well-developed business plan can flesh out the potential risk factors for the lender and well-prepared, detailed financial statements can effectively illustrate the company's financial history and performance. Providing both these documents to a lender may reduce collateral requirements.

Types of Collateral

Assets belonging to a business owner, such as equipment, accounts receivable, business inventory and buildings may qualify as collateral if the lender could sell them quickly for cash. Any assets financed with the borrowed funds are automatically considered collateral. If a loan is greater than $250,000 and secured by commercial property, a certified appraisal is required to validate the value of the property. Professional appraisals may also be necessary for other personal or business assets before they can be approved as collateral. When borrowers want to use any real estate as collateral, regulated lenders including banks are legally required to have a third-party valuation on transactions valued at $50,000 or higher.

References

• SBA.gov: Collateral
• SBA.gov: Microloan Program