Understanding SBA 7a Loan Collateral Requirements

The SBA 7a loan collateral requirements can be a bit tricky to navigate, but don't worry, I've got you covered.

To qualify for an SBA 7a loan, you'll need to have a business that's been in operation for at least two years, with a minimum credit score of 680.

A significant portion of the loan amount can be used to refinance existing debt, with a maximum of 90% of the loan amount going towards this purpose.

The SBA 7a loan is designed for small businesses, and the maximum loan amount is $5 million.

Collateral is a type of security used to ensure repayment of an SBA loan. The specifics of pledging collateral depend on your lender and financing request.

For SBA loans, collateral can include personal residences, retirement accounts, commercial real estate, equipment, and commercial vehicles. Accounts receivable and inventory could also be considered collateral in some instances.

The SBA requires lenders to collateralize all standard 7(a) loans. The SBA considers a loan "fully secured" if the business already owns enough equipment, inventory, furnishings, and other assets to meet the SBA 7(a) collateral requirements.

Here are the types of real estate that factor into SBA loans and collateral requirements:

In many cases, businesses won't have enough collateral for the SBA to consider the loan "fully secured." If you find yourself in this situation, you may need to take a lien against your residential and investment real estate. The SBA may also require this for any owners who own 20% or more of your business, or any additional required personal guarantors.

Business assets can be used to secure Community Advantage loans, and the SBA considers a loan "fully secured" if the business owns enough assets to meet the requirements. Live Oak Bank, a cash-flow lender, views collateral as a last resort in repaying an SBA loan, prioritizing cash flow over collateral.

To qualify as "fully secured", the SBA looks at the adjusted net book value of the business assets, which includes improved and unimproved real estate, new and used machinery and equipment, furniture and fixtures, and trading assets like inventory and accounts receivable. For example, improved real estate can be valued at a maximum of 85% of its market value.

Here's a breakdown of the types of business assets that can be used to secure Community Advantage loans:

If a business doesn't have enough collateral to meet the SBA's requirements, the SBA may require a lien against residential and investment real estate, or from owners who own 20% or more of the business, or additional required personal guarantors.

For loans of $350,000 or less, there are some exceptions to the SBA's collateral requirements. The SBA doesn't require lenders to take any collateral for loans of $25,000 or less.

If you're requesting a loan between $25,001 and $350,000, lenders will follow a specific process. They'll only require you to pledge collateral to the point where there's no longer a shortfall and the loan is "fully secured."

Here are the key details to keep in mind:

Collateral is a crucial aspect of SBA 7(a) loans, and understanding the types of collateral required can help you navigate the process more smoothly. SBA loans require a fair amount of information and paperwork, so researching collateral types will save you time later.

You can pledge various types of assets as collateral for an SBA loan, including personal residences, retirement accounts, commercial real estate, equipment, and commercial vehicles. Accounts receivable and inventory could also be considered collateral in some instances.

The SBA requires lenders to collateralize all standard 7(a) loans, but the specifics of pledging collateral depend on your lender and financing request. At Live Oak Bank, they are primarily a cash-flow lender and view collateral as a last resort in repaying an SBA loan.

Here are some examples of collateral that could be required for an SBA loan:

The SBA considers the adjusted net book value of assets when determining if a loan is fully secured. This includes:

In some cases, businesses may not have enough collateral for the SBA to consider the loan fully secured. If this is the case, you may need to take a lien against your residential and investment real estate.

To prepare for an SBA 7(a) loan, it's essential to have your documents in order. This will help streamline the application process and improve your chances of approval.

Gather your legal business registration documents, such as articles of incorporation, ahead of time. This will save you time and hassle in the long run.

You'll also need to collect three years of financial statements, including income statements, balance sheets, and cash flow statements. This will give the lender a clear picture of your business's financial health.

A detailed schedule of any collateral you're offering is also required. This could include assets such as property, equipment, or inventory.

To make it easier to keep track of your documents, here's a list of what you'll need:

Having these documents ready ahead of time will make the application process much smoother.

Live Oak Bank views collateral as a last resort in repaying an SBA loan, prioritizing cash flow instead.

Collateral can include personal residences, retirement accounts, commercial real estate, equipment, commercial vehicles, accounts receivable, and inventory.

At Live Oak Bank, collateral requirements depend on the loan product, size, and use of funds. Certain collateral requirements need to be met, but the specifics vary.

SBA loans require individuals to pledge personally held real estate when the equity in the property exceeds 25% of its value.

The SBA considers a loan "fully secured" when business assets alone meet the collateral requirements. This means that if your business owns enough equipment, inventory, furnishings, and other assets, the SBA won't require additional collateral.

Here's a breakdown of the types of assets that can be used to secure SBA 7(a) and Community Advantage loans:

Collateral is not required for 7(a) small loans under $50,000, but lenders follow their collateral policy for loans greater than $50,000.

As a borrower, you may be personally liable for an SBA 7(a) loan, which means your personal assets could be at risk if the loan isn't repaid.

This means that if your business can't repay the loan, the lender may seek payment from your personal savings, investments, or other assets.

The SBA requires lenders to obtain a personal guarantee from the borrower, which can make you personally liable for the loan.

A personal guarantee is a promise to repay the loan, even if your business can't.

In some cases, the lender may also require a personal financial statement, which lists your income, assets, and debts.

This can help the lender assess your creditworthiness and determine the risk of lending to you.

The SBA also requires lenders to consider the borrower's personal credit history when making a loan decision.

A good personal credit score can improve your chances of getting approved for an SBA 7(a) loan.

However, a poor personal credit score can make it more difficult to get approved for a loan.