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Launching a startup business is exciting, but it can also be stressful if you need external money to keep the momentum going. While the U.S. Small Business Administration offers several small business loans for established companies, there are also some loan options available to new ventures. This guide will cover SBA funding for startups, as well as how to apply. We’ll also cover the SBA loan requirements for startups, and alternatives for capital if these loan types won’t work for your business.

SBA Loans For New Startups

While there’s no specific SBA startup loan, there are two financing options available to newer businesses: the SBA microloan and the SBA Community Advantage Program. Each one has its own loan terms and eligibility requirements, and can help serve brand new businesses that are just starting out.

SBA Microloan

An SBA microloan for startups allows businesses to borrow up to $50,000. The average loan size, however, is much smaller at $13,000. The maximum loan term is seven years. These smaller loans are geared towards early-stage businesses, so have less strict eligibility requirements than other SBA loans and traditional loan options.

Ideal for: Managing a new business and providing working capital.

Can be used for: Working capital, inventory, supplies, equipment, furniture or fixtures.

Cannot be used for: Paying existing debt, settling lawsuits, trade disputes, fines, penalties, or purchasing real estate.

Eligible businesses: For-profit small business or nonprofit child care center.

Application Process: Even when choosing to use an SBA loan to start a business, you’ll still need to apply directly through a lender. Lenders typically require collateral and a personal guarantee in order to get approved for a microloan. Read our guide to learn more about applying for an SBA microloan.

SBA Community Advantage Program

Historically underserved communities may be eligible for the Community Advantage Program for a SBA loan for their startup. It’s specifically designed to help new entrepreneurs in underserved markets obtain working capital. You can borrow up to $350,000 over the course of 10 years through Community Advantage Small Business Lending Companies (CA SBLCs)  Originally begun as the Community Advantage Pilot program that sunsetted September 30, 2024, the Community Advantage Program is now a permanent part of the SBA 7(a) loan program, through new licenses issued to previous lenders in the program who can now issue 7(a) loans to traditionally underserved businesses.

Ideal for: New businesses located in low-to-moderate income communities that are less than two years old.

Can be used for: Purchasing commercial real estate that the owner occupies, leasehold improvements or renovations, purchase of inventory, equipment, furniture, fixtures, working capital, business acquisition, or debt refinance for any of the above.

Cannot be used for: Illegal businesses or businesses that do not meet the eligibility requirements, delinquent taxes, investment real estate, or personal use.

Eligibility requirements: Eligible businesses must be part of an underserved market. There are several ways to qualify for this designation, such as:

• Businesses located in Low-to-Moderate Income Communities, Empowerment Zones and Enterprise Communities, Historically Underutilized Business Zones, Promise Zones, Opportunity Zones or Rural Areas
• New businesses that have been operating for less than two years
• Veteran-owned businesses that are 51 percent or more owned and controlled by one or more veterans
• Businesses where more that 50% of the full-time workforce is low-income or resides in LMI census tracts.

Interested in exploring loan options, including SBA loan products like microloans and 7(a) loans, for your new business? Compare loan offers from multiple lenders with Lendio. Applying is free, and won’t impact your credit. Apply now! 

SBA Loans For Established Startups 

Once your startup has reached two years old, the options for SBA loans expand. The following options have their own eligibility requirements.

SBA 7(a) Loan

SBA 7(a) loan funds can be used for a number of purposes. The maximum loan amount is $5 million, and any loan amount over $25,000 requires collateral. Loan repayment terms can vary depending on what the loan is used for, but the repayment period is usually 10 years.

Ideal for: Businesses who have reached the growth stage.

Can be used for: Working capital, equipment, supplies, real estate, debt refinancing and ownership changes.

Cannot be used for: illegal or unqualified business as defined by the SBA, delinquent taxes, investment real estate or personal use.

Eligibility Requirements: Each SBA lender's criteria may vary for an SBA loan. For example, some may require a higher credit score than other lenders. However, at minimum you must have owner equity and engage in for-profit operation in the U.S. or its territories. Read our guide for more information about SBA 7(a) loan requirements.

SBA 504 Loan

The SBA 504 loan is designed to help small businesses make major investments. Funds can be used for long-term assets such as real estate (including updates), land, equipment, machinery, or improvements to land, parking lots, and utilities. You can’t use the funds for working capital or inventory. If approved, you could borrow up to $5 million over a period of 10 or 20 years. 

Best For: Purchasing or upgrading major fixed assets for your business.

Can be used for: Real estate, land, equipment, machinery, or improvements to utilities, parking lots, and the above.

Cannot be used for: Working capital or Inventory purchase.

Eligibility Requirements: Like 7(a) lenders, 504 lenders may set more stringent criteria to access an SBA 504 loan. In most cases, you will need strong credit history, finances, and multiple years in business to qualify. Read our guide for more details on SBA 504 loan eligibility requirements! 

Explore Lendio to find the right SBA loan option for your startup, so you can start making the business moves you need to succeed.

How to Get an SBA Loan for Startups

In order to pursue an SBA loan for your startup and increase your chances of receiving a loan, you’ll want to do some preparation first. Here are the steps to take to prepare and submit an application for an SBA loan.

1. Calculate your Startup Costs

Knowing how much you need to borrow is your first step. Pull together the costs of starting your business, including one-time costs for permits, licenses, equipment, furniture and fixtures. You’ll also need to calculate recurring expenses, such as payroll, rent, and inventory for at least your first year in business. 

Calculating your business startup costs will give you an idea of how much money you will need to get your business off the ground.

2. Write Your Business Plan

Many lenders will want to see your business plan, including research on target market, pricing structure, marketing costs, challenges, and your industry competition. Your startup costs calculation also belongs in your business plan, as well as projected income.

Without multiple years of profits to lean on in your application, you’ll need to use these tools to show that your business will be a success, so spend some time writing a business plan to help you secure funding.

3. Review SBA Loan Qualifications

All your hard work will be for nothing if you start the loan application process only to realize you won’t qualify. First, review the standard SBA loan requirements. You’ll need to:

• Be a for-profit business operating in the U.S.
• Meet the Small Business Administration’s definition of a small business.
• Be able to show your ability to repay the loan.
• Have tried to find alternative forms of funding before trying to get an SBA loan.

Because SBA loans are issued through lenders, you’ll also need to review common requirements for underwriting loans to improve your chances. Your personal credit score and business credit score should be improved as much as possible before pursuing a loan, and you’ll need to gather cash flow, sales projections and any available collateral you may have for the loan.

4. Choose a Loan and Lender for Your Startup

After reading some of the available options above, you probably have an idea of which SBA startup loan option will meet your needs. From there, you’ll need to find the best SBA lender for your startup..

The SBA provides a Lender Match tool to help you find a bank, credit union, or community-based lender that participates in your chosen loan program. You can always double check with a financial institution you’ve previously had a relationship with to see if they participate in the loan program you’re searching for.

You can also apply through Lendio to be matched with funding options that best suit your business needs. It takes 15 minutes to complete the application, and you’ll be put in front of 75+ lenders, including those who offer SBA loan options.

5. Prepare Your Loan Application

After you’ve chosen a lender, you’ll be ready to start your SBA loan application. You’ll need a lot of documentation to support your application, but there may be some variations on specific documents you need based on your loan program and lender.

Prepare all your business and personal documentation, including tax returns, financial statements, certificates and licenses, business history, business plan, contracts and more. 

You’ll also need to complete some SBA forms, such as SBA Form 1919 Borrower Information Form, SBA Form 912, Statement of Personal History, and SBA Form 413, Personal Financial Statement.

Thankfully, your lender will be able to help you through the application process and make sure you have all the required documentation.

Online Business Loans

Many online lenders have flexible qualifications and multiple loan products for startups. If you’re looking for funding fast, exploring these options can be a great way to get funding, sometimes in as little as 24 hours. Curious what kind of loan options might be best for your business? Visit the Lendio Industry funding resource center to select your industry and see loan type recommendations for your business.

Small-Business Grants

Grants for small businesses are a way to avoid accumulating debt by offering capital that you don’t have to repay. The application process may be time-consuming, but if you can secure funds this way it may be worth it for your business.

Business Credit Cards

If you need help with everyday expenses while launching your business, business credit cards for startups are a great way to build your business credit score with responsible management and earn rewards that benefit your business.  

Get Funding for Your Startup

Now that you know the SBA loan options for your startup, as well as how to apply and some alternatives to consider, it's time to figure out which loan option you’re going to pursue. Let Lendio take some of the guesswork out of funding your startup with the Lending Marketplace.

Simply fill out an application, and receive offers from our network of 75+ lenders to compare your funding options. There’s no impact to your credit score, and once you accept an offer, you could receive the funds you need for your startup in as little as 24 hours.

If you're a small business owner looking for financing options, you may have come across the term “SBA loan.” But what exactly is an SBA loan?

In this blog post, we’ll dive into the details of what SBA loans are, the pros and cons, and how to apply, while helping you understand if getting an SBA loan is the right option for your business.

SBA Loans

1. What is an SBA loan?

2. How do SBA loans work?

3. Types of SBA loans

4. Pros of SBA loans

5. Cons of SBA loans

6. What is required to get approved for an SBA loan?

7. Is it hard to get approved for an SBA loan?

8. How long does it take to get approved for an SBA loan?

9. How to get an SBA loan

What is an SBA loan?

Small Business Administration (SBA) loans are government-backed loans designed to help small businesses access the funding they need to start, grow, or expand their business.

SBA loans are partially guaranteed by the SBA, making them less risky for lenders, and therefore, more accessible to small businesses. These loans are not directly provided by the SBA, but rather through participating lenders such as banks and credit unions.

What does SBA stand for?

SBA stands for the Small Business Administration, a U.S. Government agency that supports small businesses by giving them access to capital, counseling, and other community resources.

How do SBA loans work?

Unlike traditional loans where the lender assumes all the risk, an SBA loan is backed by the government.

This means that if a borrower defaults on their loan, the SBA will partially reimburse the lender for their losses.

This guarantee reduces the risk for lenders and encourages them to provide loans to small businesses, even if they have lower credit scores or less established financial histories.

What can you use an SBA loan for?

Types of SBA loans

There are several types of SBA loans available, each designed for different purposes and needs of small businesses. Here are the most common types:

SBA 7(a) loans

SBA 7(a) loans are the most common and flexible type of SBA loan. They can be used for a wide range of purposes, including working capital, equipment purchases, real estate, and refinancing existing debt.

Visit the SBA website to read more about SBA 7(a) loans.

SBA 504 loans

SBA 504 loans are specifically designed to help small businesses purchase major fixed assets such as machinery or real estate. These loans are provided through Certified Development Companies (CDCs), private, nonprofit corporations set up to contribute to the economic development of their communities. 

The benefit of an SBA 504 loan is that it offers long-term, fixed-rate financing, making it a more affordable option for businesses looking to make major investments.

Read more about SBA 504 loans here.

SBA microloans

The SBA microloan program provides smaller loan amounts for businesses that need just a small injection of funds. These loans are designed to help startups, microbusinesses, or non-profit child care centers with their various needs, whether it's working capital, inventory, supplies, or equipment. The maximum loan amount under the microloan program is $50,000, but the typical loan size is much smaller, often averaging around $13,000. 

The exact terms of the loan depend on how much you borrow, what you'll use the loan for, and your own financial circumstances. This type of SBA loan is unique in that it is provided through non-profit community lenders who also offer business training and technical assistance, making it a comprehensive package for first-time entrepreneurs and small business owners.

Learn more about microloans and see a list of microlenders here.

SBA disaster loans

SBA disaster loans are designed to provide financial support to businesses, homeowners, and renters affected by declared disasters. Unlike other types of SBA loans, disaster loans are directly funded by the SBA, not through lenders. They offer low-interest, long-term loans for physical and economic damage caused by a declared disaster. 

Businesses of all sizes, homeowners, and renters can apply for a physical disaster loan to repair or replace damaged property, while businesses and non-profit organizations can apply for an economic injury disaster loan to help meet working capital needs caused by the disaster. The SBA will determine the loan amount and term based on each borrower's financial condition.

Read more about SBA disaster loans here.

SBA loans vs. conventional loans

Since SBA loans are government-backed, there are a few specific differences to call out relative to conventional loans.

1. You can qualify with a much younger, riskier business profile. Conventional loans typically require at least 6 months of time in business, whereas SBA loans work with eligible startups. Since lenders shoulder less risk from the actual loan, they’re willing to take on more risk from the lender.
2. SBA loan amounts are capped at $5.5 million. Conventional loans don’t have defined limits, and can vary more greatly.
3. SBA loans have a longer approval time. Since you have to meet requirements for both the lender and the government, approval can take more than 30 days. For conventional loans, approval can happen in just a few days.
4. SBA loans have capped interest rates. While SBA loans may not offer the lowest possible interest rates, they keep the ceiling of interest lower than conventional loans. See current SBA loan rates here.

Eligibility requirements for an SBA loan

Is it hard to get approved for an SBA loan?

Given the combination of personal and business requirements, it’s moderately difficult to get approved for an SBA loan—not easy, but not overly difficult. A large part of the approval process revolves around your personal history and available financial resources.

To qualify for an SBA loan, you must meet the following requirements:

• Your business must operate in the US and be legally registered
• Your business must fall under the SBA's definition of a small business
• You must have invested your own time and money into your business before seeking outside funding
• You need to have a good credit score (typically above 680) and a solid financial history
• Collateral may be required, depending on the type of loan you apply for

Pros and cons of SBA loans

Application process for an SBA loan

Applying for an SBA loan requires you to know a lot about your business, and requires a combination of personal and business-specific paperwork to submit successfully.

1. Understanding the numbers behind your business:

To qualify for an SBA loan, it’s important to note that your business should have been operational for a reasonable period of time. Many lenders prefer businesses to have been in operation for at least two years.

This is to ensure that your business has a proven track record and demonstrates stability and the ability to generate consistent revenue.

In terms of credit score, a personal score of at least 680 is generally preferred by most lenders. This high credit score showcases your reliability and ability to repay the loan.

Otherwise, you need to know your business down to the dates and dollars its comprised of. Are you able to prove profit and loss and cash flow for your business? Can you show both historical numbers and future projections to prove you’re generating revenue?

You should be prepared to show all money in and out, taxes, and any existing debt.

2. Making sure you have the proof:

Do you have all the documentation needed to prove the dates and dollars mentioned above?

This includes fundamental business and financial documents, such as your business plan, personal and business income tax returns, personal and business bank statements, and a balance sheet. You’ll also need to provide financial projections, ownership and affiliations, business license, loan application history, and business lease.

3. Finding an SBA-approved lender in your area:

Your next step is to find an SBA-approved lender in your area. This could be a traditional bank, a Community Development Company (CDC), or a microlender, depending on your needs.

The SBA has a free online Lender Match tool that can connect you with participating SBA-approved lenders within 48 hours. They also provide lists of CDCs and microlenders.

When choosing a lender, consider factors such as their SBA loan expertise, the types of businesses they typically work with, and their understanding of your industry. Building a relationship with your lender can be beneficial, as they could provide valuable guidance throughout the loan application process.

4. Submitting your application.

After you’ve gathered all necessary documentation and found an SBA-approved lender, you’ll need to package your paperwork together alongside SBA forms 1919 and 413.

Your lender will guide you through the application process and help you submit all required documents.

How long does it take to get approved for an SBA loan?

The timeline for approval can vary depending on the type of loan you apply for and the lender's processing times.

Typically, the application process can take anywhere from one to three months (30 to 90 days), while the funds can take an additional one to two weeks to be disbursed.

What happens to an SBA loan if your business closes?

Sometimes it happens—your business closes. In that case, what happens to your SBA loan?

Like any other loan, you need to continue making payments, or else you’ll go into default, where lenders can begin to seize collateral.

The SBA does compromise in some cases. Via their Offer in Compromise (Form 1150), businesses that default on their loan are able to apply for a settlement of a lower amount if paid in full more immediately. In this case, the loan is considered paid off.

Generally, the most important thing to keep in mind—you’re responsible for the money owed to the lender no matter what.

SBA loans can be an excellent financing option for small businesses looking to grow or sustain their operations. With an understanding of your requirements, you can begin to search for an SBA lender today.

As a small business owner, financing backed by the U.S. Small Business Administration (SBA) represents some of the most affordable types of business loans available. SBA loans are a popular option for both startups and established businesses alike. These loans tend to feature low interest rates, higher loan amounts, and generous repayment terms compared to other business loan options. 

At the same time, understanding how to apply for an SBA loan and qualify for this type of financing can be complicated. The SBA loan application process can be tedious, and if you don’t complete it properly, you could hurt your chances of getting a loan approval. 

That’s why Lendio has put together a complete guide to applying for an SBA loan, including types, requirements, the application process, and how to improve your chances of approval.

Step 1: Decide which type of SBA loan you need.

There are several different types of SBA loans available to small businesses. With SBA loans, your business may be able to borrow up to $5 million and repay those loans over a period of 10 to 30 years. (Repayment terms can vary.)

You can find SBA loans to help you finance many different aspects of your business needs. Whether you need startup funding, working capital, equipment financing, inventory financing, or funding for some other type of business need, you may be able to find an SBA loan to support your goals. 

First, Ask yourself a few key questions about your business needs to find the right SBA loan program for your needs, like:

• How much funding do I need?
• What will I use the funding for?
• What is the minimum repayment term I need to work with?

Once you figure out the type of SBA loan you want, you can determine if your business is eligible for the loan program. 

Step 2: Check eligibility requirements

The specific eligibility requirements that your business needs to meet in order to qualify for an SBA loan will vary based on a few factors. First, each SBA loan program has unique requirements you must meet to qualify. In addition, you may need to satisfy additional loan requirements that your SBA-approved lender requires from small business borrowers. 

The minimum requirements for most SBA loans are as follows. 

• Be an operating business
• Operate for profit
• Be located in the U.S. or in U.S. territories
• Can meet SBA “small business” size requirements 
• Not be a type of ineligible business
• Be creditworthy and demonstrate reasonable ability to repay the loan
• Collateral to secure a large percentage of the loan
• Unable to access business financing through non-government means (not including personal funds)

If you meet these requirements, then the next step is confirming that you qualify with an SBA lender, and this is where it can get complicated. Let’s go over some major eligibility requirements with most SBA-approved intermediary lenders as lender standards vary.

Creditworthiness Requirements

SBA 7(a) loans and SBA 504 loans are issued by traditional lenders, so they will have more stringent credit criteria than other loans, like microloans.

Most lenders for these loans will want to see a FICO® credit score of 650 or above.

On the other hand, SBA microloans have less strict credit criteria, and you may be able to qualify with limited credit history.

Time in Business Requirements

Like credit criteria, SBA 7(a) loans and SBA 504 loans will require more time in business and proof of revenue than microloans.

Most lenders will want to see at least two years in business for 7(a) and 504 loan applicants. In contrast, lenders may not require as much time in business for the microloan program, with some lenders only requiring six months in business.

If you meet these eligibility requirements, the next step is to gather all the documentation you will need for the application process.

Step 3: Prepare documentation for SBA loan application

Before you apply for an SBA loan, it’s important to gather the documentation your lender will request on your application. The time it takes to move through the SBA process from application to funding will vary.

While it might take 30 to 90 days with your local bank, Lendio, on average, can close an SBA 7(a) small loan in less than 30 days. Having your documents prepared ahead of time may help improve your chances of approval and could help you move forward through the SBA loan process at a faster pace.

Below is a list of the documents you should prepare for your SBA loan application:

• Six months of business bank statements (connect account or manually upload images)
• Copy of your driver’s license or state ID
• Voided check from your business account
• Month-to-date transactions
• Two years of business and personal tax returns (for all business principals with 20% or more ownership)
• Debt schedule
• Year-to-date profit and loss statement
• Year-to-date balance sheet
• Cash flow projections
• List of collateral
• Business certificates or licenses
• Loan application history
• Business owner resume(s)
• Business plan
• Business lease, if applicable

Additional SBA loan application requirements.

In addition to the documents listed above, you should be prepared to include more information on your SBA loan application. Details you may need to provide include: 

• The amount of money you want to borrow.
• The purpose of the loan and how you plan to use the proceeds if approved.
• Assets you need to purchase and the name of your business suppliers.
• When your business started.
• General information about your business (owners, affiliations, etc.).
• Your birthday and your Social Security number
• Details regarding other business debts and your creditors.

Anyone who owns 20% or more of the business will generally need to fill out an SBA loan application form, as the SBA requires that anyone with 20% or more ownership in the business provide an unlimited personal guarantee.

Owners with less than 20% ownership can provide full or limited guarantee. Owners will also need to complete a personal financial statement, called SBA Form 413. SBA uses the personal financial statement to assess risk and help determine an applicant’s ability to repay as promised. 

Here's a list of SBA-specific forms to include in your application package:

• SBA Form 1919 - Borrower Information Form
• SBA Form 912 - Statement of Personal History
• SBA Form 413 - Personal Financial Statement
• SBA Form 148 - Unconditional Guarantee (or lender’s equivalent to this form.)
• SBA Form 148L - Limited Guarantee (or lender’s equivalent) for owners with less than 20% ownership

Step 4: Find an SBA-approved lender

You can use an SBA loan to support your small business in many different ways. Once you feel ready to begin your SBA loan application, you can start by choosing an SBA lender to guide you through the process. 

Depending on the type of SBA loan program you are applying for, you might have a few different options for finding an intermediary lender. Since SBA 7(a) loans and SBA 504 loans lenders are more traditional financial institutions, you can try reaching out to a bank you have a previous relationship with.

The SBA also offers a few resources for finding active certified development companies (cdcs) and active microlenders on their website.

If you would like to connect with lenders directly, you can use the SBA’s lender match system. You’ll fill out a questionnaire about your business, and in two days, you’ll receive an email with possible lender matches. 

Lendio offers a convenient SBA loan application process. Potential borrowers can complete an application and get a preapproval within 24 hours, and after providing the documentation listed above, can get funded with a 7(a) small loan in less than 30 days.

Step 5: Submit your SBA Loan Application Package

Once you’ve prepared your loan application package, it’s time to submit it to the lender. Don’t be surprised if they may follow up with questions, or request for additional documents. Every lender has different requirements, so work with your contact to provide everything they need to begin the initial underwriting process to review your application.

If your lender decides to move forward, you can expect a “loan proposal” or “letter of intent” to follow. This document will detail your request, loan terms, and deposits, fees and/ or closing details.

If you accept and sign the proposal, you’re not out of the woods yet. Your lender will begin a formal underwriting process, in which both the lender and the SBA review your application, documentation and credit history thoroughly.

If you are approved after this process, you will be notified and provided a letter of commitment. You must accept it in order to receive closing documents and start the closing process. Once everything is signed and the process is complete, your money will be disbursed.

What to do if your SBA Loan application is denied

Although it's not the outcome you want, only about one-third of SBA loan applicants were fully approved in 2023. A decline is not uncommon, so knowing your options if this happens will help you plan for your next steps.

If your application is denied, your lender will provide you with a letter explaining the reason you were denied, and may provide some options for you after that. You may be able to appeal the decision, for example, and your lender can provide insight.
Read our guide on common reasons why your SBA loan application may have been declined, and what to do next.

Alternatives to SBA Loans

If you aren’t able to find a workaround in the event that your SBA loan was declined, or if you aren’t confident you meet the eligibility requirements, here are some other alternatives to consider:

• Equipment financing- if new equipment upgrades, repair or replacement is what you need, consider exploring term loans or leases for equipment.
• Term business loans - If you don’t qualify for an SBA loan, you may still be able to obtain a business loan paid off with equal payments at a fixed rate through other lenders.
• Business lines of credit- Opening a line of credit enables you access to funds that you can borrow anytime up to your credit limit.

Business loans are crucial for helping small businesses thrive by providing the necessary capital to cover startup costs, invest in inventory, or upgrade equipment. For many small business owners, these loans are not just a means to an end; they are a lifeline that enables them to seize growth opportunities and navigate the challenges that come their way. Therefore, it is vital to understand the current lending landscape that small businesses are facing.

Key stats.

• 68% of small business owners say access to financing is the most important factor in the growth of their businesses.
• 67% of small business owners have no preference about which type of lender they get a loan from.
• 85% of small business owners said that speed to loan approval is important when selecting a lender. 
• 77% of small business owners surveyed stated that they prefer to apply for a loan online or via a mobile app.
• 50% of small businesses say they don't know if the bank they use for checking has the right loan options for them. 
• Only 24% of small business owners apply through the bank they already work with.
• The average small business loan is $38,000.
• 59% of SBA loans are approved.

High-level overview.

Lendio recently surveyed 1000+ small business owners to better understand how financing affects the success of their business, their experience in today's lending environment, and how they view the future of small business lending. Of those small business owners, 68% said that access to financing is the most important factor in the growth of their businesses. Additionally, 46% of those 1000+ small business owners said they would see anywhere from 30-100% revenue growth if they had access to financing their business needs.

Lendio found that 78% of the small businesses it interviewed have a positive outlook on their ability to access capital in the next year. Perceptions vary based on how well-qualified the small business is for a loan. Only 12% of the most qualified borrowers stated that the majority of small businesses don't have access to the capital they need while 21% of the least qualified borrowers said the same.

Lendio found that while small business owners generally have a positive outlook on their ability to access capital, they have a fairly neutral perception of the loan application process. When asked which type of lender they'd prefer 67% of small business owners said they have no preference.

The takeaway:

85%

of small business owners say speed to loan approval is important when selecting a lender.

While larger enterprises are willing to experience lengthy loan approval and funding processes, small business owners behave more like consumers--they prefer a quick and easy loan process. 

• 85% of small business owners said that speed to loan approval is important when selecting a lender. 
• 77% of small business owners surveyed stated that they prefer to apply for a loan online or via a mobile app.

Lendio also found a general lack of awareness of the small business loan process. 

• 50% of small businesses say they don't know if the bank they use for checking has the right loan options for them. 
• Only 24% of small business owners apply through the bank they already work with. 
• Lendio found that 22% of small business owners either don’t know or don’t have a preference for their preferred type of business financing.

These findings point toward a need for more education about the lending landscape for small business owners.

Average business loan amount.

Understanding the average loan amounts small businesses receive is critical for entrepreneurs seeking to plan their financial strategies effectively. Businesses should be aware of not only the amounts they might qualify for but also how these figures align with their growth aspirations and operational needs. 

• The average amount a small business receives through Lendio’s marketplace is $38,000. 
• The average SBA loan amount in 2023 was $479,685.
• On average, small businesses are offered 50% of the loan amount they initially asked for.

SBA loan approval rates.

The Small Business Administration (SBA) plays a vital role in supporting small businesses by providing access to loans with favorable terms. In 2023, approximately 59% of SBA loans were approved (34% received full approval, 25% received partial approval), indicating that over half of small business owners successfully navigate the application process. This is particularly encouraging for entrepreneurs who might face challenges securing traditional financing, as SBA loans often come with lower interest rates and longer repayment terms.

Reasons for a business loan.

Lendio found that the majority of small businesses pursue loans for a variety of essential reasons, primarily to secure working capital (33%) to support daily operations and manage cash flow. Additionally, small businesses often seek financing for crucial investments like equipment purchases (19%), expansion efforts (15%), starting a business (14%), payroll (6%), real estate (4%), or for other purposes (9%). Each of these reasons highlights the integral role that loans play in facilitating growth and sustainability in the competitive business landscape.

Gender insights

Men and women generally had similar responses to Lendio's survey questions, but a few differences stood out.

Only 46% of women are positive or very positive that they can access the capital they need compared to 55.8% of men who said the same. 13% of women also rated their ability to access the capital they need as "very poor" compared to 9% of men.

Another key insight points to a need for education surrounding the business lending landscape, especially for women. 53.3% of women and 41.7% of men are unsure of their primary bank's loan options. More women business owners stated that they would like education on the business loan application process across the board except interest rates (this was equal). This includes lender types, loan agreements, and loan types.

Women-owned businesses received just 32.6% of approvals and 28.4% of the dollars offered in SBA 7(a) and 504 loans in the 2024 fiscal year. Across the lending landscape as a whole, women are less likely to receive the full amount of funds requested. In 2023, 45% of women-owned businesses were approved for the full amount of capital requested vs. 55% of men-owned businesses.

Additionally, 25% of women are denied a business loan compared to 19% of men.

Minority insights

When it comes to accessing business loans and receiving funding, entrepreneurs of color can face significant challenges.

• 84% of businesses started by a person of color relied on personal savings or funding from friends or family to fund their businesses. 
• 28% of employer businesses started by a person of color have obtained a business loan compared to 48% of white-owned business startups.
• Nearly half of black business owners who apply for a loan are denied.

Conclusion

Understanding the lending landscape for small businesses is crucial for their growth and success. The statistics presented highlight the significant role that access to financing plays in empowering entrepreneurs across the United States. While optimism prevails among small business owners regarding their ability to secure capital, challenges persist, particularly for women, minority, and veteran entrepreneurs.

Even though the acronym UCC sounds like a college of some sort, it stands for the Uniform Commercial Code (UCC). And rather than hand out diplomas, the UCC was developed to regulate how commercial transactions operate.

OK—But what's a UCC filing?

UCC filings are how lenders establish their right to the assets you, the borrower, use to secure a loan. The filing serves as a lien, so that there's public record of your efforts to take out a loan.

UCC filings are made up of UCC-1 and UCC-3 filings, explained in more detail below.

What is a UCC-1 filing?

A UCC-1 is the official original UCC filing that gets made by a lender, referring to the UCC1 form that's needed in order to do so. It's effectively a public announcement lenders make that either a borrower has taken out a loan with them or is looking to take out a loan with them.

This filing defines the collateral the borrower puts up to secure financing, which prevents a borrower from using the same collateral for multiple loans (a move that would put the lenders at much higher risk).

You could think of it as the financial version of “going public” on social media with a new relationship. Once you change that relationship status, other people who might be interested can see you’re already committed to someone else. They allow lenders to see how you’ve treated other loans in the past.

What is a UCC-3 filing?

A UCC-3 filing is simply an amendment to the original UCC-1 filing. 

This might be used to update the information of the borrower or lender, add or change collateral, terminate a filing, or reassign or terminate creditor interest.

What is the difference between a lien and a UCC filing?

Put simply, a UCC filing serves as a lien, whereas a lien may not always be a UCC filing.

Liens can span everything from personal property, to real estate, to tax liens, child support, and much more. UCC liens fall within this list as another subcategory.

Oftentimes, liens arise from legal issues, and can be created involuntarily—for instance, with a property lien. UCC liens are intentionally created by creditors to establish a security interest.

When does UCC filing happen?

This step depends on the lender and the loan product.

Some UCC filings happen after you’ve secured funding. Others are actually filed when you apply for funding so lenders can protect themselves from borrowers trying to get multiple loans at the same time without the lenders knowing about it.

SBA UCC filings

As a security measure, the SBA will file a UCC lien on EIDL loans of more than $25,000. In this case, the SBA establishes the right to any assets you use to secure your EIDL loan, in the case that the loan goes unpaid.

Is a UCC filing bad?

No. UCC filings aren’t bad, nor are they good. They are used as a safety blanket for lenders to secure loans they provide to borrowers. If you take out a loan that goes unpaid, the fact that there is a filing can become a bad thing, but the UCC filing itself does not impact your credit or ability to obtain future loans.

How do you know if you have a UCC filing?

To find if you have a UCC filing, or simply search UCC liens in general, you can use a public record lien search tool, which are usually available on a State-level.

Most states provide public databases of UCC filings. Click below to learn more about accessing UCC filings in your state:

(Note: In some cases, a subscription might be required for access.)

• Alabama UCC Search
• Alaska UCC Search
• Arizona UCC Search
• Arkansas UCC Search
• California UCC Search
• Colorado UCC Search
• Connecticut UCC Search
• Delaware UCC Search
• Florida UCC Search
• Georgia UCC Search
• Hawaii UCC Search
• Idaho UCC Search
• Illinois UCC Search
• Indiana UCC Search
• Iowa UCC Search
• Kansas UCC Search
• Kentucky UCC Search
• Louisiana UCC Search
• Maine UCC Search
• Maryland UCC Search
• Massachusetts UCC Search
• Michigan UCC Search
• Minnesota UCC Search
• Mississippi UCC Search
• Missouri UCC Search
• Montana UCC Search
• Nebraska UCC Search
• Nevada UCC Search
• New Hampshire UCC Search
• New Jersey UCC Search
• New Mexico UCC Search
• New York UCC Search
• North Carolina UCC Search
• North Dakota UCC Search
• Ohio UCC Search
• Oklahoma (individual counties keep UCC records)
• Oregon UCC Search
• Pennsylvania UCC Search
• Rhode Island UCC Search
• South Carolina UCC Search
• South Dakota UCC Search
• Tennessee UCC Search
• Texas UCC Search
• Utah UCC Search
• Vermont UCC Search
• Virginia UCC Search
• Washington UCC Search
• Washington, DC UCC Search
• West Virginia UCC Search
• Wisconsin UCC Search
• Wyoming UCC Search

How can you remove a UCC filing?

A UCC termination filing requires an amendment be made to the original UCC-1 filing, completed using the UCC-3 form.

Thing is, a UCC-3 form can only be submitted by the lender. To get a UCC lien removed, you must ask your lender to file a UCC-3 form, which then comes at their discretion.

In most cases, liens are not removed until you’ve fully repaid a loan.

In the end, UCC filings typically serve purely as an informational guideline—a “just in case” stipulation. It helps to be aware of any UCC filings you might have, but in general, if you’re paying your debts, UCC liens should not bring you any harm.

While some debt is considered good debt for small business owners—debt that ultimately helps the borrower net more in savings or income—other debt is deemed “bad debt.”

The latter includes debt that can directly and negatively impact a business owner’s credit score, or that costs money or potentially limits their ability to secure financing in the future. Past-due debt, sometimes referred to as “delinquent debt,” falls into this category.

What is past due debt?

Past-due debt is the money owed on a missed debt payment.

For example, let’s say you receive a credit card bill of $1,000 with a minimum monthly payment of $50. If you don’t make that $50 payment on time (usually within a month), it will become past due.

This debt payment will often accrue late fees and additional interest if not paid—and continue to accrue fees for as long as it remains unpaid.

You don’t necessarily need to pay the full $1,000 at once—but you missed the required minimum payment, which caused a debt payment to become past due.

Past-due debt can arise from anything that requires regular payments—utilities, rent, credit cards, business loans, and invoices. Any required payment that goes unpaid becomes past due.

What is the difference between past due debt and delinquent debt?

The difference between past due debt and delinquent debt is simply semantics. Debt that is past-due is also considered delinquent.

However, while any unpaid payment is past due, there are differing levels of delinquency. Each level has its own penalties and risks to your financial reputation. Here are a few examples:

• Within 10 days: Many lenders have a grace period of a couple of weeks during which you can pay off the debt. During this time, there aren’t late fees or penalties as long as you pay off your debt. (This grace window varies by the lender—some will charge a fee if you miss the payment date by even a day.) 
• After 10 days: You may receive a late fee for your delayed payment, but the lender won’t take any action against your account. 
• After 30 days: If you skip a full billing cycle, your creditors will likely report this missed payment to the national credit bureaus. This report can impact your credit score and add delinquency to your credit history.   
• After 90 days: If you continue to miss payments, you’ll likely accrue more penalty fees and interest. Your interest rates may increase, and your credit will keep dropping. Eventually, your creditor will send your account to collections and freeze any services you receive.

The impact of past due debt on your business

If you’re contending with multiple sources of debt, start with your past-due accounts. Late payments and delinquent debt can linger on your credit report and negatively impact your credit score.

With a poor credit score, loans (of any kind) will become harder to get—you’ll have to battle less favorable terms and higher interest rates, assuming you can get a loan at all. Paying off your overdue debts first could prevent your account from going into collections and affecting your credit score. 

If possible, make the minimum payments on all of your accounts—even if you can’t pay off the full balance. Hitting these minimum payments proves to creditors that you’re still willing to pay what you owe and aren’t going to fall into delinquency.

If you are ever in a situation where you’re unable to make the minimum payment, contact your creditor ASAP. Some credit card companies offer hardship programs where you can pause payments for a few months. Your other lenders may be willing to accept partial payments in the short run.

How long do late payments stay on your credit report? 

Payment history is one of the biggest factors of your credit score. Your history lets lenders know how likely you are to miss a payment or become delinquent on the account.

Because of its high value, a missed payment will stay on your credit report for 7 years, whether the missed payment is 30- or 90-days late. 

However, a missed payment might not affect your credit score for the full 7 years. If you only miss a few payments, then your credit score might rebound in a couple of years. Multiple factors contribute to your credit score, and maintaining a good payment history is one of the best ways to keep it strong.

How to solve your past due debt

If you have an upcoming loan payment that you can’t afford, don’t panic. Below, we’ll show you a few tactics to keep your lenders satisfied and your cash flow flowing when paying off your debts isn't a readily available option.

Find short-term financing

It’s always scary to fight debt with debt, but sometimes it’s necessary. If you’re struggling to make your loan payments, consider one of these short-term financing options:

• Business Lines of Credit: Use a line of credit to cover practically any business expense: payroll, rent, debt payments, supplies—you name it! You can get funds in as little as 1 to 2 weeks, and then you’ll get immediate access to any funds you use as soon as you repay the amount used.
• Business Credit Cards: If you don't qualify for a line of credit, a business credit card is another great short-term financing option. You can make your necessary loan payments on your credit card and earn cashback and travel rewards while you're at it. Plus, you can score a card with a 0% interest period (sometimes as long as 18 months), meaning you can make lower monthly payments with fewer consequences.

Negotiate with your lenders

Your lenders don’t want you to default.

If you’re struggling to make payments, they may be willing to temporarily restructure your loan. This act could mean lower interest rates, payment deferments, and extended terms.

For example, Bank of America allows businesses to request deferments on loan payments without negative credit reporting.

Funding Circle provides forbearance, repayment flexibility, and even late fee forgiveness. 

Talk to your lender and see what help they’re willing to provide. It doesn’t hurt to ask, and you might be surprised with their leniency.

Set reminders for your minimum payments

While your lenders will likely remind you about upcoming bills, you can also set payment reminders to ensure that you at least make your minimum payments.

These reminders will help you avoid past-due debt, even if you still need time to pay off your full balance. Making these small payments will help to protect your credit and your future financial opportunities.

If you’re too busy to remember to make payments, you can also set up autopay options to draft from your account. Just make sure you have enough money to avoid overdraft fees.

Boost your cash flow

Improving your cash flow is probably one of the harder options, but it’s still possible. To boost your cash flow, you’ll need to increase sales or decrease expenses (or both). 

Consider areas where you can cut spending. Every dollar counts. And then look for where you can grow your sales. With the digital world as your oyster, there are endless possibilities for making revenue online.

Don't give up

If you can’t make your loan payments, don’t give up. There’s a way out—you’ll make it through this. Hold your head up high and fight for your business’s survival.

A variety of reasons support buying a commercial property for your business. One is that it can give you the flexibility to adapt the building to your needs or expand your operations. Another compelling argument in favor of purchasing a commercial property is that doing so can help you build equity, which is an obvious disadvantage to renting.

Considering whether to buy or rent a commercial space can be difficult, and it is worth noting that those who rent will always, in a sense (and cents), be at the mercy of their landlord. If you have an opportunity to buy commercial real estate with a fixed-rate loan, however, you can make your expenses easier to manage and avoid the risk of either having to pay more in rent or move your business elsewhere.

Purchasing a commercial property for your business could also offer you an array of potential tax benefits and deductions. This includes depreciation and the chance to deduct the interest portion of the mortgage payment. In addition, when you locate your business in the commercial real estate investment, you could potentially deduct the maintenance expenses from the business income. Also, there is a chance you could pay rent to yourself as the property owner, and the rent would be a deduction.

What is commercial real estate?

Commercial real estate refers to properties that are used for business purposes. This type of real estate includes spaces where businesses operate, whether they're retail stores, offices, warehouses, or other types of buildings that generate profit.

Types of commercial real estate.

• Multifamily - As the name implies, this refers to residential investment properties housing multiple families, such as apartment complexes, duplexes, triplexes, and even assisted living communities.
• Office - This refers to large, small, or medium-sized buildings capable of supporting a variety of businesses with a need for space, such as medical providers, attorneys, or accountants.
• Retail - This type of commercial real estate refers to a space that a consumer-facing business may be interested in, such as a coffee house, department store, or a suite in a strip mall.
• Industrial - This term refers to warehouses, production facilities, and distribution centers—basically any type of building a manufacturer may need.
• Hospitality - This area generally covers buildings that are either the current or former home of businesses in the service industry, such as restaurants, hotels, bars, or resorts.
• Special Purpose: Properties specifically designed for a particular business, like hotels, schools, or self-storage facilities.

Within the confines of commercial office real estate, there are three different types.

• Class A refers to commercial real estate of the highest possible quality. These are usually newer buildings in a prime location and in good condition.

• Class B refers to middle-range commercial properties that may be older and lower in price compared to Class A, making them a good target for renovation or restoration.

• Class C commercial real estate refers to older properties in a less-than-optimal location with extensive wear and tear.

How to buy commercial real estate for your business.

Consider the following elements when beginning the purchase process.

1. Identify property requirements.

Understanding your personal goals as a commercial real estate investor is essential, as your goals will influence the property requirements. Are you looking to build a brand or a retail establishment? How much foot traffic are you hoping to attract?

When looking into commercial real estate, consider the following:

• Budget: Know what you can afford before you start looking.
• Zoning Laws: Ensure the property is zoned for your type of business.
• Accessibility: Make sure the location is easily accessible for your customers and employees.
• Future Growth: Think about your future needs and whether the property can accommodate them.

2. Secure financing.

There are a variety of commercial real estate loans available with different terms and commercial mortgage rates. Bear in mind that, unlike a personal mortgage that may be able to cover up to 100% of the cost of the property, a commercial mortgage will typically cover only up to 75% to 80% of the cost of the property. 

Commercial mortgage

This refers to any sort of financing where the loan is secured by the value of the underlying commercial asset, which could include a warehouse, apartment complex, office building, shopping center, etc.

SBA 504 loan 

The SBA 504 loan is a loan program administered by the Small Business Administration (SBA), in which small business owners partner with Certified Development Companies (CDCs) to secure financing. Usually, a 504 loan will include a first mortgage for around 50% of the cost, from a third-party lender. The SBA will back a second mortgage, up to 40%. This would only leave the remaining 10% to the small business owner, allowing that individual to free up capital. The loan can be used to expand, buy real estate, or purchase equipment.  

Hard money loan 

This type of financing originates from private individuals or businesses, instead of traditional financial institutions. Generally, a hard money loan refers to a nonconforming loan that can be used to purchase a commercial or investment property, often with a much shorter duration and a higher interest rate compared to other options. A physical asset or property is usually required to serve as collateral for this type of loan. 

3. Enlist an experienced team.

Buying commercial real estate can be a complex process, so it's essential to have a team of experienced professionals to guide you. Here are the key people you should consider involving:

• Real Estate Agent/Broker: Specializes in commercial properties and helps you find suitable options. They can negotiate on your behalf and provide market insights.
• Attorney: A lawyer with expertise in commercial real estate can help you with contracts, zoning issues, and legal due diligence.
• Commercial Lender/Mortgage Broker: They can assist in exploring financing options and securing a commercial real estate loan that fits your needs.
• Accountant: Provides financial advice, helps with tax considerations, and aids in determining the property's financial viability.
• Property Inspector: Conducts a thorough inspection of the property to identify any structural or maintenance issues that need to be addressed.
• Appraiser: Offers an independent assessment of the property's value to ensure you're making a sound investment.
• Contractor: If the property requires renovations or modifications, a reputable contractor can estimate costs and manage the construction process.

4. Evaluate the value of the property.

Determining the value of a commercial property is a critical step in the purchasing process. Here's how you can approach it:

1. Comparable sales (Comps): Look at recent sales of similar properties in the same area. These comps provide a benchmark for the current market value.
2. Income approach: Evaluate the potential rental income the property could generate. This method involves calculating the net operating income (NOI) and dividing it by the capitalization rate to estimate value.
3. Cost approach: Consider the cost of replacing the building with a similar one, including the value of the land and the depreciation of the current property.
4. Professional appraisal: Hire a certified appraiser who specializes in commercial real estate. An appraisal will give you a detailed report on the property's value based on various factors, including location, condition, and market trends.
5. Future potential: Assess the property's potential for appreciation. Investigate local economic growth, infrastructure projects, and zoning changes that might affect the property's value over time.
6. Physical condition: Conduct a thorough inspection to identify maintenance or structural issues. Properties in better condition typically command higher prices.
7. Market conditions: Stay informed about the current real estate market trends and cycles. The value of commercial properties can fluctuate based on supply and demand dynamics.

5. Make an offer.

Once you've researched the property you'd like to purchase, you can begin the offer process.

1. Determine your offer price: Based on your evaluation of the property's value and your budget, decide on an initial offer price. Keep in mind that this price should be competitive but also leave room for negotiation.
2. Prepare a letter of intent (LOI): Draft a Letter of Intent outlining your proposed terms and conditions. The LOI should include the offer price, payment terms, due diligence period, and any contingencies such as financing or inspection results.
3. Submit the LOI: Present the Letter of Intent to the seller through your real estate agent or broker. This document serves as a formal expression of your interest and opens the door for negotiations.
4. Negotiate terms: Be prepared to negotiate with the seller. This may involve several rounds of counteroffers until both parties agree on the final terms. Your real estate agent or broker can be invaluable in guiding you through this process.
5. Draft the purchase agreement: Once both parties agree to the terms, have your attorney draft a formal purchase agreement. This legal document will outline all the specific details of the transaction, including contingencies, closing date, and any special conditions.
6. Due diligence period: After the offer is accepted, you'll enter the due diligence period. During this time, conduct thorough inspections, review financial records, verify zoning laws, and ensure there are no hidden issues with the property. This period allows you to confirm that the property meets your expectations before finalizing the purchase.
7. Secure financing: Work with your commercial lender or mortgage broker to finalize your financing arrangements. Ensure all necessary documents and approvals are in place to secure the loan.
8. Close the deal: If everything checks out during the due diligence period and your financing is secured, proceed to the closing. This stage involves signing all required documents, transferring funds, and obtaining the keys to the property.

Ready to start looking into financing for a commercial property? Learn more about commercial mortgages.

As a small business owner, you’re probably familiar with at least a few of the many loan products available. Many lenders require you to offer an asset to secure a debt. As time goes by, you might find yourself securing multiple loans with the same asset—a process called cross-collateralization.

Cross-collateralization is fairly common—“second mortgages” are a popular form of cross-collateralization, for example. There can be many benefits to taking advantage of cross-collateralization, but this process also increases the risk of losing assets, so it’s important to understand how cross-collateralization works before making any formal arrangement.

What to know about collateral.

There are two main types of loans: secured loans and unsecured loans. These loans differ in regard to collateral requirements. Collateral is an asset that a borrower offers up as a way to guarantee the amount of a loan. Common forms of collateral include cash deposits, real estate, or vehicles.

Secured loans require collateral, while unsecured loans do not. If you default on secured loans, the lender can seize the collateral as repayment for the loan amount. Lenders of unsecured loans, like credit cards, have no such recourse, but this usually causes the repayment terms of unsecured loans to be less favorable for the borrower.     

In many cases, a lender uses an asset to secure the loan for that very asset. This is common with home mortgages, car loans, and equipment financing. If you have a mortgage, your house is the collateral—so if you default on your mortgage, the lender can then collect the collateral and repossess your house.

What is cross-collateralization?

Cross collateralization refers to a situation where multiple loans are secured with the same asset.

In a second mortgage situation, your home serves as collateral for a mortgage. As you pay down your mortgage, you own more of your home. You can then use your home as collateral for a second loan, i.e., a second mortgage.

Cross collateralization also occurs if different types of financing are secured with the same asset. If you’re paying off a car loan, the car becomes collateral for this loan. If you use the car as collateral for another type of financing, like a credit card, this is cross-collateralization.

“Cross-collateral refers to a method that lenders use to utilize the collateral of a loan such as a car to secure a second loan that an individual may have with the lender,” explains Jason Gordon at The Business Professor. “When an asset is cross-collateralized, it brings up issues as to which secured party has priority to the asset in the event of default.”

Less commonly, cross-collateralization also refers to a situation when a lender requires multiple forms of collateral for a single loan.

How cross-collateralization works.

Understanding the workings of cross-collateralization is crucial for any business owner considering this route. Essentially, this process ties the value and security of one or more loans to the same collateral. This is advantageous in situations where you may not have enough separate assets to secure multiple loans. For example, if you have equity in your property, you can leverage it to secure not just a primary mortgage but also a business loan or line of credit.

When you enter into a cross-collateralization agreement, it's like you're giving the lender a broader safety net. In the event of a default on any of the loans secured by the same asset, the lender has the right to seize and sell that asset to cover your debt. This means the stakes are higher for you because failing to repay one loan could jeopardize the asset tied to all the loans.

One critical aspect to monitor with cross-collateralized loans is the loan-to-value (LTV) ratio. This ratio measures the loan amount against the value of the collateral securing it. A higher LTV ratio indicates more borrowing against the asset, which can be risky if the market value of the collateral decreases.

For businesses, cross-collateralization can open doors to additional funding that might not be available otherwise. However, it compounds the risk to your assets. Therefore, it's wise to carefully assess your financial stability and the implications of tying multiple debts to vital assets before proceeding with such arrangements.

Benefits and risks of cross-collateralization.

Cross-collateralization can be a double-edged sword for savvy business owners, meshing intriguing benefits with profound risks. It's like stepping into a strategic game where your assets are on the line, offering a chance to secure more funding while posing a significant risk if the tides turn. In this section, we'll unravel the perks and perils of cross-collateralization, aiming to provide a balanced view that helps you weigh its worthiness against your business strategy.

Benefits

• Increased loan access: Cross-collateralization can significantly enhance your borrowing power. By leveraging the same asset for multiple loans, businesses can access higher loan amounts or more favorable terms than might be available with unsecured financing.
• Flexibility in financing: This strategy offers flexibility, allowing businesses to tap into the equity of their assets, such as real estate or vehicles, for various financial needs, from expanding operations to covering unexpected expenses.
• Potential for better rates: Often, loans that are secured by collateral have lower interest rates compared to unsecured loans. Cross-collateralization might help negotiate lower rates due to the added security it provides lenders.

Risks

• Increased loss risk: The primary risk of cross-collateralization is the potential loss of valuable assets. If a business cannot meet its loan obligations, the asset securing multiple loans could be seized, having a more significant impact than defaulting on a single secured loan.
• Complexity in managing loans: Juggling multiple loans tied to the same collateral can lead to intricate financial management challenges. Keeping track of various terms, interest rates, and repayment schedules requires diligent oversight.
• Difficulty in switching lenders: Once an asset is cross-collateralized, it may be more challenging to refinance or obtain new loans with different lenders. The existing cross-collateral agreements might limit flexibility and negotiation power with potential lenders.

What is a cross-collateral loan?

A cross-collateral loan essentially links the collateral of multiple loans together. This means if you've borrowed money to purchase a car and later decide to take out a personal loan, the same car can act as the collateral for both loans if both are through the same lender. This strategy can be particularly appealing for borrowers looking to maximize their borrowing capacity without having to find new assets to secure each loan. 

However, it's essential to understand that cross-collateralizing your loans binds them together in a way that can complicate future financial moves. For instance, if you wanted to sell the car that's serving as collateral for your loans, you'd need to pay off or substantially pay down the debts to remove the lender's claim on your asset. This intertwining of debts and assets makes managing your finances a bit more complex but can be a powerful tool in the right circumstances.

Is cross-collateralization legal?

Cross-collateralization is legal and fairly common, but a lender is required to inform you that cross-collateralization is occurring.

If you take out multiple secured loans from the same lender, like a bank, it might use the same collateral, making your assets cross-collateralized. You must legally consent to this, but do your due diligence in reading over any loan agreement. Be especially aware of “dragnet clauses” where a lender can pursue your asset if you used it for collateral for any loan with the lender.“

Lenders cannot use your business’s property as collateral without your consent,” writes Shawn Grimsley in the Houston Chronicle. “Lenders obtain your consent to cross-collateralization through a dragnet clause, which may allow the lender to use the collateral for any loans or other obligations your business may owe the lender.”

Is cross-collateralization bad?

If you can make your loan repayments on time, you’ll probably have no issues with cross-collateralization. Trouble arises if you default, however. If an asset is cross-collateralized and you default on one of your loans, you will default on all of your loans, because the asset can no longer secure any of them.

Can banks cross-collateralize?

Banks cross-collateralize often, but cross-collateralization is even more common with credit unions. Cross-collateralization is especially conventional when you seek multiple loans from a single lender. With every loan you take out, read over the agreement and make sure you consent to how a loan is secured.

How do I get out of cross-collateralization?

The best way to untangle yourself from a bad cross-collateralization situation is to contact the lender and attempt to renegotiate your loan. You might, for example, be able to secure the remaining debt with other collateral, although the repayment terms might be worse.

Bad cross-collateralization situations usually end with the loss of the asset, even if you declare bankruptcy. Unfortunately, besides repayment, the only way to get out of cross-collateralization is by letting your lenders repossess the collateral.

Alternatives to a cross-collateral loan.

Exploring alternatives to a cross-collateral loan is important for any business owner seeking flexibility and minimal risk in financing options. One such alternative is seeking out unsecured loans. Although typically bearing higher interest rates due to the increased risk for the lender, unsecured loans do not tie down your assets, providing peace of mind and simpler asset management.

Another option could be asset-based lending, which focuses on the value of specific assets rather than intertwining them across loans. This method allows for targeted borrowing against inventory, receivables, or other business assets without cross-collateralization complications.

Crowdfunding or peer-to-peer lending platforms also present innovative financing avenues. These methods can offer more favorable terms and the opportunity to avoid traditional banking systems and their associated risks and constraints. Each alternative has its unique set of benefits and considerations, gearing towards providing a tailored solution that aligns with your business's financial strategy and growth objectives.

Navigating the complexities of cross-collateralization requires a delicate balance between leveraging your assets for financial gain and protecting them from undue risk. Whether you're a seasoned business owner or new to the entrepreneurial scene, understanding the intricacies of secured loans, including cross-collateral loans, is crucial.

By weighing the benefits against the potential drawbacks and considering viable alternatives, you can make informed decisions that align with your financial goals and risk tolerance. Remember, the key to successful financial management lies not only in securing the necessary funds but also in maintaining control over your assets and their future.