Thinking about expanding your small business? Maybe you have outgrown your current space, need to purchase more inventory to meet demand, or to upgrade to more modern equipment. In order to keep up with your customers and competition, you may want to consider a small business loan or line of credit to finance purchases or renovations. The (SBA) has set guidelines for small business loans offered by private lenders which may make them more accessible to you than other loans. However, many of these loans still require collateral and it’s important to understand what that is and how it can affect your assets before applying for an SBA loan.
What is business collateral?
Collateral is the security used to ensure your lender has a secondary source of repayment in case you are unable to make payments on your SBA loan. Other that are not guaranteed by the SBA also require collateral but, for now, we’ll just focus on those regulated by the SBA as the collateral requirements and structure are often ideal for businesses seeking financing. Business collateral for SBA loans can be any or all assets your business has including, but not limited to, your commercial real estate, inventory, machinery and equipment and accounts receivable. The personal assets of the owners could also be considered.
What are the SBA loan collateral requirements?
If you apply for an SBA loan through a private lender, you will likely be subject to an ABA (All Business Assets)lien. This means that everything your business owns is collateral for the loan. Generally the primary collateral is whatever assets that are purchased through the loan, but given that these assets may have limited collateral value, other assets will likely need to be pledged. This is especially true if the loan will be spent on something that is not easily converted to cash, like inventory or assets classified as an “intangibles,” or“soft assets,” as in customer lists, goodwill, etc.
The good news is, with the SBA loan program guarantee , even if you have inadequate collateral, you will still be able to obtain a loan from a private lender, provided there aren’t more extensive concerns with your application. Plus, depending on the size of your loan, you may be able to receive an unsecured loan. This means the amount is small enough that the lender is willing to shoulder the risk without business collateral. The amount of the loan that can be unsecured may vary by lender.
Who is responsible for the business collateral on the loan?
Anyone who owns 20% or more of the business will have business and personal assets reviewed by the lender in question. Assets may come from any of these owners and not necessarily in proportionate amounts. The bank will simply take what it needs from what is available, starting with business assets. However, as a business owner, even if your personal assets are not leveraged, you are still responsible for ensuring payments are made in full and on time to avoid default through the personal guarantee of the owner(s).
If you miss payments, you will need to work with your bank to adjust your payment schedule so you can maintain both daily operations and loan obligations as much as possible. After a set number of days or delinquent payments, which may vary by institution, the bank can request loan payment in full. This means that the business will need to convert the collateral to cash in order to repay what is owned on the loan. This may or may not be the collateral securing the loan depending on the situation and your relationship with the bank.
How to prepare business collateral to apply for an SBA loan
Small business loans and lines of credit are usually applied for to obtain the necessary funds to grow a business. As such, the collateral may be based in part on accounts receivable from a business’s projected growth. Your lender will likely need to look over your company’s tax returns and financials, including balance sheets and income statements, from the last few years, as well as financials from the last 90 days. An appraisal of your business or the property you are acquiring is not necessary, but if you have had one done it is usually beneficial to share it. Your balance sheets will help show the bank the worth of your assets and the strength of your company, which can in turn determine the SBA loan or line of credit amount you qualify for that would best fit your business’s needs.
After you have your financials in order and have made an internal assessment of your business collateral, speak to a business banker to determine which will work best for your situation.
Content was created and provided by RBS Citizens Financial Group.