Question – What are the SBA’s collateral requirements?
Our Response – Even though the SBA provides a guarantee to the bank, there are still SBA collateral requirements to get a business loan. Collateral is an additional form of security which can be used to assure a lender that you have a second source of loan repayment. Assets such as equipment, buildings, accounts receivable, and (in some cases) inventory are considered possible sources of repayment if they can be sold by the bank for cash. Collateral can consist of assets that are usable in the business as well as personal assets that remain outside the business.
The collateral value of those assets are based on a table through SBA and range between 20% & 80%. For example, owner-occupied residential, apartments, commercial buildings and vacation homes are valued at 80% of appraised value, undeveloped land at 50%, new equipment is up to 50% and used equipment, accounts receivable, inventory, etc is up to 20%.
The bank will first go to the collateral value of the business assets. If those assets are not enough to secure the loan, they will go to personal assets to use as collateral. If your primary residence has less than 25% equity (equity is the amount an asset is appraised for versus what is owed) it can’t be used.
We have had cases where the business owner isn’t willing to put their house up to secure the loan which sends a powerful signal to the bank as the client is essentially saying they don’t have confidence in their idea.