SBA Loans and Collateral for a Start Up

Let us assume you want to obtain a loan for $50,000 or more And your only real estate asset is a primary residence with equity of $50,000 or more.

1. When you are looking for financing, a bank or other institutional lender will finance your loan request with an SBA Loan and no other type of financing.
2. Why? Because if you default, your asset will cover part of the defaulted loan and the SBA will pay off the remaining balance (up to 75% of the loan amount).
3. SBA Lenders finance start-ups all the time. You will be interested to know that the Small Business Administration (SBA) does not require collateral for any type of loan request (including a start-up). This is all lender “overlay” to mitigate its own risk
4. However, most if not all SBA Lenders will require some form of collateral for you to qualify for a loan. Usually this is in the form of real estate and will include your primary residence.
5. The SBA Lender will want to collateralize the 25% of the loan not “protected” by the SBA Guarantee. Or, often the SBA Lender will want up to 50% of the loan secured by the Borrower’s asset(s).
6. The reason the SBA Lender will want up to 50% of the loan secured is for bank auditing purposes and to make sure the borrower keeps his head in the “game.”
7. What is the difference between the 25% and the 50%? First, this has to do with the value and equity of your real estate. Second, it has nothing to do with the percentage of guarantee for the loan.

a) For Example, if the bank wants the loan to be 50% secured by your real estate and you are requesting a loan of $150,000 dollars, then you will need to have more then $75,000 dollars of equity in your real estate (more because the SBA Regulation requires the Lender to calculate 85% of the equity and then multiply by the 50%).

b) You ALWAYS guarantee 100% of the loan, not a percentage. If you default on a loan of $150,000 and the deficiency is $140,000 dollars, then you owe $140,000 (plus interest).

8. There is a lot of work and effort needed to obtain a loan for a start up: Three years of Projections, What makes up those Projections (Assumptions), a Business Plan, sometimes a Market Study and then filling out all the forms required for an SBA Loan

9. There is risk involved and you need to go into the loan process with your eyes wide open with the risks understood. Along with a lender who will work with you, find an accountant and lawyer for their advise and what they will need to do for you and your business.

For more information go to this link.

You can contact Joel Soforenko at: [email protected]