Business Loans

A Small Business Owner’s Guide to SBA Collateral Requirements

Nov 16, 2023 • 5 min read
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      As a small business owner, you may have heard of the Small Business Administration (SBA) loans as a potential funding source for your business. These loans are backed by the SBA, providing lenders with a guarantee in case of default. However, one aspect that often raises questions and concerns is collateral requirements. 

      In this blog post, we’ll break down everything you need to know about SBA collateral requirements, including common misconceptions and personal guarantees.

      Is collateral required for SBA loans?

      The short answer is yes, collateral is typically required for SBA loans. This means that the borrower must provide assets or property to secure the loan in case of default. However, the type and amount of collateral may vary depending on the specific SBA loan program and lender.

      Some things that may count as collateral for an SBA loan include:

      • Commercial real estate or land
      • Machinery and equipment
      • Inventory
      • Accounts receivable
      • Cash savings or deposits
      • Personal assets (e.g., a home or car)
      • Investment properties
      • Financial instruments such as stocks or bonds

      What are some common misconceptions about SBA loan collateral requirements?

      One common misconception is that only physical assets (Ex: real estate or equipment) can be used as collateral. While these are common forms of collateral, lenders may also consider other assets such as accounts receivable or inventory.

      It’s also important to note that the SBA has specific guidelines for the type and value of collateral required for their loan programs. Lenders must follow these guidelines when determining collateral requirements.

      Another misconception is that the SBA itself provides the loan. In reality, the SBA guarantees a portion of the loan provided by an approved lender, reducing the lender’s risk and making it easier for small businesses to access funding.

      Many business owners believe that the SBA provides collateral for SBA loans. This is not the case. The SBA guarantees a portion of the loan, but it’s still up to the lender to determine collateral requirements.

      Do SBA loans require a personal guarantee?

      Yes, it is SBA policy that every SBA loan must be backed by a guarantee. A personal guarantee is a promise from the business owner to personally repay the loan in case of default. This means that even if your business fails, you will still be responsible for repaying the loan with your personal assets.

      What to know about personal guarantees.

      It’s important to understand the implications of a personal guarantee before signing on the dotted line. While providing a personal guarantee may increase your chances of getting approved, it also puts your personal assets at risk. It’s crucial to carefully consider your ability to repay the loan and any potential risks before agreeing to a personal guarantee.

      Additionally, some lenders may require multiple guarantors, which means that multiple individuals, such as business partners or investors, will be responsible for repaying the loan if the business is unable to do so.

      The SBA does allow third parties to assume the liability of a personal guaranty.

      Will I be able to get an SBA loan without collateral or a personal guarantee?

      It’s possible but rare. Some SBA loans, such as the 7(a) program, may provide financing without collateral for loans of $50,000 or less. However, in these cases, the lender will still require a personal guarantee.

      As a small business owner, understanding SBA collateral requirements is crucial when considering financing options for your business. While collateral and personal guarantees may seem daunting, they are necessary measures to protect lenders and make loans more accessible for small businesses. With the right information and preparation, you can confidently navigate SBA collateral requirements and secure the funding your business needs to thrive.

      Remember, the SBA is here to support and assist small business owners like you in achieving their goals, so don’t let the concept of collateral discourage you from exploring the option of an SBA loan. So, do your research and find the best fit for you and your business.

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      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

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