If you are considering applying for an SBA loan for your business, it is important to understand what collateral may be required. Collateral is defined as something of tangible value being pledged as security for a loan. It is used for business loan applications and can be forfeited in the case of default on your loan. The type and value of the collateral to be used for an SBA loan, depend on the loan amount and the use of funds. For example, working capital loans up to $750,000 may not require a pledge of tangible assets as collateral. However, a personal guarantee from the owner(s) of the business as well as a general lien on the business and all its assets may be required.

Here’s what you need to know to understand the collateral requirements:

  1. When reviewing your loan application, a lender will first ensure that the Net Income of the business is sufficient to repay the proposed debt. After the sufficient Net Income threshold is confirmed, certain collateral requirements need to be met depending on the loan type, loan size, and the use of funds.
  2. Common examples of collateral that could be required are personal residence, investment and retirement accounts, commercial owner-occupied Real Estate, equipment, and commercial vehicles. In some cases, Accounts Receivable and inventory could also be considered.
  3. If the loan proceeds are used to purchase inventory, equipment, or Real Estate, all assets financed with loan proceeds must be included as collateral. The same is true if the SBA loan is used to refinance or consolidate existing loans against the above mentioned assets.
  4. If the value of the available assets being pledged is not sufficient, SBA requires individuals to pledge personally owned Real Estate when the equity in the property exceeds 25% of its value. For example, if a borrower owns a home worth $450,000, and the mortgage is less than $350,000, then the property has 25% or more equity. Consequently, SBA would require that property be pledged as a secondary collateral. A second lien will be placed on the property at closing.
  5. For all SBA loans, personal guarantees are required from every owner or stakeholder with 20% ownership or more of the business, and in some cases from the individuals who hold key management positions.

SBA 7a loans up to $750,000 can be approved and funded without tangible collateral. However, it’s important to understand when collateral is required and what assets may be pledged for SBA loans. We’re here to serve as your guide and partner throughout the lending process.

About 504 Advisors, Inc.

504 Advisors functions as a consultant and an advisor for our clients throughout the entire SBA & Real Estate financing process. As business owners and entrepreneurs, we understand how daunting the SBA financing process can be, and use our decades of experience in commercial finance to guide you through the financing options and the loan application process.

Our goal is to be your trusted financial partner and advisor, by providing our clients with access to capital and financing solutions necessary to run their business.

Capitalize on our relationships and find the best loan that fits your needs. For more information visit http://www.504advisors.com

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