All Your Business Loan Collateral Questions Answered

All Your Business Loan Collateral Questions Answered

What are SBA’s collateral requirements?

When applying for an SBA loan, it's important to know that requests aren’t rejected solely due to insufficient collateral. In fact, one of the key reasons lenders utilize the SBA program is to assist applicants who demonstrate repayment ability but may not have enough collateral to cover the loan in case of default.

For loans exceeding $500,000, the SBA mandates that a lien be placed on the available equity of your personal real estate, which includes both residential and investment properties, if your equity stands at 25% or more of the fair market value. However, if your equity is less than 25%, lenders aren't required to secure the loan with personal property. When determining if a loan is “fully secured,” real estate can be valued at 85% of its market value. It's also worth noting that even if your real estate equity is below 25% of its fair market value, lenders are not prohibited from placing a lien.

Assets Owned by You and Your Spouse: If you or your spouse own 20% or more of the business, lenders must consider taking a lien on personal real estate (investment or residential) owned by you individually or jointly with your spouse.

Understanding collateral requirements: Keep in mind that real estate transferred to a spouse or minor children within six months of applying will still be considered as available collateral. If you secure a Home Equity Line of Credit (HELOC) before applying for your SBA loan and that leaves you with less than 25% equity in your home or investment properties, a lien won’t be necessary. Additionally, liens on personal residences or investment properties may be capped at 150% of the equity in the collateral due to potential tax implications in your state.

Additional requirements for debt refinancing: If you're using an SBA 7(a) loan to refinance existing debt, be aware that the new loan must be secured with at least the same collateral and lien priority as the existing debt. If the debt being refinanced is already over-collateralized according to SBA standards, the lender might allow the release of excess collateral. Substitute collateral can be offered if it is of comparable value and useful life and is acceptable to the SBA lender. (Check the Debt Refinance page for more details.)

Is my house required as collateral? You don’t need to have equity in a property to qualify for an SBA loan. However, if you do have equity, an SBA lender may need to use it as collateral under certain conditions. For loans over $500K, if you have 25% equity in any personal real estate, including residential and investment properties, it must be used as collateral, potentially up to the full loan amount. If you're considering an SBA loan greater than $500K and have at least 25% equity in your home, obtaining a HELOC can lower your equity to under 25%, thereby avoiding a junior lien from the SBA lender.

What does having a UCC lien on your business mean? Your lender will file a UCC-1 blanket lien against your business, covering all current and future business assets.

Can I use securities instead of my house as collateral? If you need to provide property as collateral, you can substitute it with securities, but only if those securities fully cover the loan amount. Note that Whole Life Cash Value and Marketable Securities cannot replace a residence unless they fully secure the loan amount.

What happens if I sell my house while there’s a bank lien on it? If you sell your house, you must notify your lender. The process involves paying off the mortgage, with your equity held in escrow by the bank until they release the lien. When purchasing another property, that amount can apply to your new purchase, and the lender will place a lien on the new property. If the equity isn’t applied to another purchase, it will need to be allocated toward the SBA loan balance.

This article is authored by Darin Manis, founder of LoanBox.