When seeking out a traditional business loan, most business owners prepare to put up a significant amount of collateral, often including business property, equity, and personal assets. However, collateral requirements for SBA loans are more flexible than the average term loan, providing numerous advantages for many businesses.
Common collateral misconceptions
The collateral requirements of SBA loans are the source of many common misconceptions. Business owners often come into the process assuming if they don’t have ample assets for collateral, they won’t be approved for any SBA loan program. This is not entirely accurate when taking the full scope of SBA lending programs into account.
At the same time, it’s important to note that all SBA loans require some form of collateral from the borrower. Lenders of SBA loans need to meet the administration’s minimum requirements, but make final collateral determinations on a case-by-case basis. Lenders are looking for proof that business borrowers have some “skin in the game.”
Collateral for SBA loans may take on many different forms, including:
- Business assets such as real estate or equipment
- Accounts receivable or inventory
- Personal assets of the business owner
The type and total value of collateral required by an SBA lender can also vary depending on the breakdown of equity in the company held by each owner or previous lender.
What to know about personal guarantees
While the details surrounding collateral for SBA loans can vary widely depending on the unique situation, there is one requirement that all of the administration’s lending programs share. All loans insured by the SBA require a personal guarantee from every owner with a 20 percent or greater equity stake in the business. Personal guarantees may also be requested from key executives or other senior-level managers.
A personal guarantee is a legally binding document acknowledging that the business owners or executives involved are personally responsible for repaying the loan. Without a personal guarantee, lenders feel less confident in extending credit to a business.
Personal guarantees involve a level of risk for business owners as their personal assets such as real estate or savings could be on the line if the business cannot meet the loan’s repayment obligations. But that risk comes with a significant reward — access to reliable financing from a trusted lender. In turn, the lenders themselves can more confidently establish and maintain their relationship with a small business.
More specific details on minimum collateral amounts and limits are set by the SBA. Beyond that, individual lending institutions set their own policies for the collateral they need from each business. In the end, collateral is just one piece of the puzzle for SBA loans. By allowing for a degree of flexibility in underwriting, this makes it possible for small businesses to tap into funding that will fuel growth and allow them to turn their most ambitious plans into a reality.
Lenders at First Business are involved experts who can help position your business for success as it grows. With a wealth of contacts and industry-specific experience that our clients use as a competitive advantage, First Business partners with you as a trusted lender that your business will never outgrow.
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