SBA 7(a) 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 who wants to buy a business for $1,000,000 that has $250,000 worth of equipment collateral, but the rest of the purchase price is goodwill. Assuming the borrower does not have equity in a home that could be pledged, this loan is still eligible with only the $250,000 of equipment to secure it. Conversely, if the borrower in this loan, 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.

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