Collateral Types for SBA 7a Loans
Let’s talk about collateral for an SBA 7a loan. First, it is important to know that LTV on a SBA 7a loan will not be possible on most occasions because SBA 7a loans are typically under-collateralized.
Collateral is based on the business assets available to secure the loan, additional assets obtained with the loan proceeds and business real estate, as is applicable. Personal guarantees along with personal assets of guarantors also serve to further strengthen the loan request.
Last but not least is an Assignment of Life Insurance where appropriate. Below is a brief out line of each collateral class. At times there are very specialized business assets which are identified in underwriting and considered on a case by case basis.
- Business assets typically consist of cash, A/R, inventory, equipment FF&E and tenant improvements which are secured by UCC filings and in some cases liens on larger equipment such as trucks for a trucking company. The business might also own commercial real estate which can help collateralize a new SBA 7a loan. A valuation of some business assets may be required during the underwriting process.
- Additional assets would be any of the type listed above that were purchased or refinanced with loan proceeds and would be secure as outlined above. A valuation of some business assets may be required during the underwriting process.
- Personal guarantees of the owners of 20% or more are required and in cases where the guarantors have personal assets, with equity available, those assets will need to be pledged to secure the loan.
- Assignment of Life Insurance is necessary when the guarantor is key to the business and there is no other person who can fill the same role and be able to carry on the business successfully.
- NOTE: If an assignment of life insurance is required the borrower should start this early in the loan process as it can sometimes take a while to complete.