The Role of Collateral for SBA Loans

I like to tell small business owners that SBA loans offer them lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans, because I think that is a concise description of the government guaranteed SBA 7(a) loan program.  Sometimes conventional bank financing is not available to a small business due to the newness of the business, due to insufficient capital investment by the owner(s), due to unstable cash flow, or just because the bank does not have an appetite for long-term small business loans.  There are other times, however, when the banker requires more collateral.

Because the SBA loan program was designed to provide financing to small businesses which have a promising future, but which do not have the resources a conventional bank lender may require, the following guidelines govern the SBA lender’s collateral requirements:

  • A loan request is not to be declined solely on the basis of inadequate collateral. In fact, one of the primary reasons lenders use the SBA-guaranteed program is for those Small Business Applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan if the loan defaults.
  • SBA does not permit its guaranty to be used as a substitute for available collateral. SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral.
  • When loan proceeds will be used to purchase assets, a first security interest in those assets must be obtained. When loan proceeds will be used to refinance existing debt, the loan must be secured with at least the same security as the debt that is being refinanced.
  • SBA considers a loan as “fully secured” if the lender has taken security interests in all available assets with a combined “liquidation value” up to the loan amount. “Liquidation value” is the amount expected to be realized if the lender took possession after a loan default and sold the asset after conducting a reasonable search for a buyer and after deducting the costs of taking possession, preserving and marketing the asset, less the value of any existing liens. Further, if there is a collateral shortfall on the SBA-guaranteed loan and there is other available collateral, the lender will be required to take such collateral, including personal assets of the principals.

There are other details and exceptions to policy which an SBA lender can identify for the small business loan applicant when applying these guidelines.  A borrower in Texas, for instance, cannot be required to pledge a lien on their personal residence due to homestead laws in the state which prevent business lenders from taking liens on personal homes.  Texas lenders can, however, place liens on personally-owned investment real estate to shore up an insufficient collateral position for the SBA loan.

We are also aware of other collateral requirement changes being instituted by SBA as of 1/1/14:

  • For loans of $25,000 or less, SBA lenders are not required to take collateral.
  • For loans over $25,000, up to and including $350,000, the lender must follow the collateral policies and procedures included in its credit policy for its non-SBA guaranteed loans, but at a minimum the lender must obtain a lien on the applicant’s fixed assets to secure the loan.
  • For loans over $350,000, the SBA lender must collateralize the loan to the maximum extent possible up to the loan amount.  If fixed assets do not fully secure the loan, the lender must take available equity in the personal real estate of the principals as collateral.

As you can see, the SBA lender must stay abreast of the latest SBA directives for the program; yet, the small business borrower can almost always count upon more liberal guidelines for loan approval and terms than with conventional bank financing.

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About Bruce Hurta

Bruce Hurta has extensive experience in Small Business Lending. He has served in a number of commercial lending and banking capacities in his career including, President of a Houston-area community bank for 6 years, managed Independence Funding Company, a non-bank start-up in 1994, where he developed his SBA lending expertise. Bruce spent 4 years in Finance as a bank examiner for the Texas Banking Department, 7 years in executive management at two community banks, and 14 years as SBA Lender. He is active in the commercial realtor and business brokerage communities, along with various business and industry organizations. Bruce Hurta is Vice President - Business Development in Houston, TX for Fidelity Bank SBA Lending nationwide. Fidelity Bank offers SBA 7(a) loans, SBA 504 loans, and USDA loans for small businesses to purchase or construct new buildings for their small business operations, to acquire a business, to expand a business or to buy out a business partner.
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3 Responses to The Role of Collateral for SBA Loans

  1. www.businesscene.com says:

    Great article Bruce.. Enjoyed it. Let’s get together for lunch is the near future. My treat.

    Best,
    Fred

  2. James Wigg says:

    I am exploring the possibility of filing a lawsuit against a Florida bank that denied my 75 year old mother an SBA loan for a business acquisition, despite her being qualified in every respect (credit, down payment, industry experience), other than sufficient collateral. The bank clearly stated it will not move forward with the loan on the basis of inadequate collateral, even thought the SBA’s SOP (Standard Operating Procedures) states clearly on pages 154 and 155 that a lender is not to decline a loan solely on the basis of inadequate collateral. Attempts to work through this with Patrick Carey, the banker, Katrina Winberg, the bank’s SBA regional manager, and the bank’s Executive Officer, have not resulted in a resolution. The bank insists on denying to even put the loan through underwriting on the basis of insufficient collateral. Mr. Patrick Carey, the banker, was presented with a full SBA loan package on the front end of the deal and was asked clearly on first contact if the bank would have a potentially issue with the collateral shortfall, if all other factors met the bank’s underwriting guidelines. He stated that this would not be a factor for denial and he induced my mother to enter the loan application process on the basis of this representation. I was informed by Katrina Winberg that the bank pulled my mother’s credit and then the loan committee refused to put the loan through underwriting even though my mother’s credit file is completely free of any derogatory items and she has credit scores in the mid 700’s from all three of the major credit reporting bureaus. This was a clear case of misrepresentation and she has now lost the ability to close on a purchase contract for a business that is generating profits of over $650,000 per year. My mother is a woman of Spanish descent and she is 75 1/2 years old. There was potentially an issue of age and race discrimination involved.

    • Bruce Hurta says:

      James – Every small business loan application, including SBA loans, will involve a strengths and weaknesses analysis for each of the following five criteria: (1) Cash flow and repayment ability (2) Management experience and credentials (3) Equity (or skin in the game) from the borrower (4) Credit history of the applicant (5) Collateral offered for the loan. Even though SBA loans are not required to have full collateral coverage, a lack of collateral will be considered a weakness that must be offset by other strengths in the loan application. Making a decision to grant an SBA loan is not an exact science, and different SBA lenders will have different appetites for types of loans they are comfortable approving.

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