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Do SBA 7(a) Loans Require Collateral?
The SBA 7(a) loan programs don't require collateral, but individual banks may have their own requirements. Buildings, equipment, and land are all possible types of collateral that you can offer.
Understanding SBA 7(a) Loan Collateral Requirements
When you’re looking to obtain an SBA 7(a) loan, your lender will almost always expect to secure the loan if you have sufficient collateral. Therefore, you should be prepared to offer up your assets as collateral when you meet with your SBA lender.
If this is a problem, you may be able to get an unsecured loan with few collateral requirements if the amount of your loan is small enough that the lender is willing to shoulder the risk without business collateral. The amount of the loan that can be unsecured tends to vary by lender.
What Does the SBA See as Collateral?
Loan collateral is the security used to ensure lenders have a secondary source of repayment in case borrowers are unable to make payments on SBA loans. Your business’ collateral requirement for your SBA loan can be any or all assets your business has. This includes (but isn’t limited to):
Your commercial real estate
Inventory
Machinery
Equipment
Accounts receivable
What types of collateral are required for an SBA 7(a) loan?
When you apply for an SBA 7(a) loan, you will be subject to an ABA (All Business Assets) lien, or blanket lien. Essentially, this means everything your business owns is collateral required for your SBA loan. Your primary collateral is usually assets purchased through the SBA loan. If these assets have limited collateral value, other assets will need to be listed for your collateral requirement.
Your SBA lender will have you fill out a document titled “SBA Eligibility Questionnaire for Standard 7(a) Guaranty.” This form helps you list all your collateral so your lender may determine if you have enough eligible collateral requirements for an SBA loan. The questionnaire covers such topics as ineligible businesses, business size standard, affiliations, personal resources, and use of proceeds.
What happens if I can't provide collateral for an SBA 7(a) loan?
If you can't provide collateral for an SBA 7(a) loan, you may be able to get an unsecured loan with few collateral requirements if the amount of your loan is small enough that the lender is willing to shoulder the risk without business collateral. The amount of the loan that can be unsecured tends to vary by lender. (Source)
While the SBA guarantees a large percentage of an SBA 7(a) loan, your lender is still on the line for the remaining percent. Offering collateral instills confidence in recovery should you default. Generally, a lender prefers that you offer something like equipment, real estate, or other high-value assets which they could sell, if needed. (Source)
How does the SBA determine the value of collateral for an SBA 7(a) loan?
The SBA determines the value of collateral for an SBA 7(a) loan by having the borrower fill out the SBA Eligibility Questionnaire for Standard 7(a) Guaranty. This form helps the borrower list all their collateral so the lender may determine if they have enough eligible collateral requirements for an SBA loan. The questionnaire covers such topics as ineligible businesses, business size standard, affiliations, personal resources, and use of proceeds.
The SBA also requires that the borrower provide collateral for the loan. Generally, a lender prefers that the borrower offer something like equipment, real estate, or other high-value assets which they could sell, if needed. If the borrower has sufficient cash flow, the SBA won’t be as concerned with collateral requirements; however, showing the SBA that the borrower is fully invested in the success of their business (which putting up collateral of their own goes a long way to prove) definitely increases their chances of approval and success.
What are the risks of using collateral for an SBA 7(a) loan?
The risks of using collateral for an SBA 7(a) loan include the possibility of having to liquidate assets to repay the lender if you miss a set number of delinquent payments. If you miss any payments, you will need to work with your lender to adjust your amortization schedule so you can maintain both daily operations and loan obligations. Should you miss a set number of delinquent payments, the lender can request the loan payment in full. Essentially this means that your business will need to liquidate its assets (convert the collateral requirements to cash) to repay the lender as quickly as possible.
What are the benefits of using collateral for an SBA 7(a) loan?
The benefits of using collateral for an SBA 7(a) loan are that it instills confidence in the lender that they can recover their funds should the borrower default on the loan. Collateral also shows the SBA that the borrower is invested in the success of their business, which can increase the chances of loan approval and success.
According to www.sba7a.loans/eligibility-and-qualifications-for-the-sba-7a-loan, "While the SBA guarantees a large percentage of an SBA 7(a) loan, your lender is still on the line for the remaining percent. The collateral you provide is split between the SBA and your lender; offering collateral instills confidence in recovery should you default. Generally, a lender prefers that you offer something like equipment, real estate, or other high-value assets which they could sell, if needed. If you’ve got sufficient cash flow, the SBA won’t be as concerned with collateral requirements; however, showing the SBA that you’re fully invested in the success of your business (which putting up collateral of your own goes a long way to prove) definitely increases your chances of approval and success."
According to www.sba7a.loans/sba-7a-loan-terms-rates-fees-maturity, "The SBA has two requirements for collateral for this type of loan: When the loan is approved, all available business assets are expected to be made available as collateral for the loan. If the value of the company assets are not high enough to provide enough security for the loan, the SBA may register liens on personal assets such as your home or other real estate holdings. If you don’t have enough collateral to secure the loan, don't worry, the SBA won’t turn down your application based on this fact if you meet all other qualifications."
The owners’ personal assets can also be considered.
If you apply for a loan greater than $350,000, and your business assets do not fully secure your loan, your lender must show the SBA that you have personal assets available as collateral requirements for the loan. This can unnerve a lot of potential borrowers, but chatting with your lender can help you navigate any options about putting up personal property as security for your loan.
Learn more: SBA Loan Amounts, Terms, and Interest Rates
What Are the SBA Loan Collateral Requirements?
When you apply for an SBA loan, you will be subject to an ABA (All Business Assets) lien, or blanket lien. Essentially, this means everything your business owns is collateral required for your SBA loan. Your primary collateral is usually assets purchased through the SBA loan. If these assets have limited collateral value, other assets will need to be listed for your collateral requirement.
Your SBA lender will have you fill out a document titled “SBA Eligibility Questionnaire for Standard 7(a) Guaranty.” This form helps you list all your collateral so your lender may determine if you have enough eligible collateral requirements for an SBA loan. The questionnaire covers such topics as ineligible businesses, business size standard, affiliations, personal resources, and use of proceeds.
Who Is Responsible for the Business Collateral Requirements on the Loan?
Anyone who owns 20% or more of the business will have to have their business and personal assets reviewed by the lender for collateral requirements. As a business owner, even if your personal assets aren’t used for collateral, you are still responsible for ensuring payments are made in full and on time to avoid default.
If you miss any payments, you will need to work with your lender to adjust your amortization schedule so you can maintain both daily operations and loan obligations. Should you miss a set number of delinquent payments, the lender can request the loan payment in full. Essentially this means that your business will need to liquidate its assets (convert the collateral requirements to cash) to repay the lender as quickly as possible.