If you are a new business just starting out, or an existing business that just needs an extra financial boost, then you likely will have heard of small business loans.
One of the most common small business loans that you will come across is the SBA loan which is partially guaranteed by the U.S. Small Business Administration. These loans are then offered by participating lenders, and are available from most high street banks.
When it comes to getting a loan, then SBA loans are one of the tightest when it comes to lending standards. However, they are also one of the most flexible loans, offering low interest rates and flexible terms, so that you can tailor the loan to fit your business perfectly.
This is why SBA loans are one of the best ways to fund your business. But what about the collateral that you need to be eligible for these loans? In this guide we’re taking a look at this, and lots more.
What collateral is needed for an SBA loan?
There are lots of different business loans available that don’t require collateral, but SBA loans generally do. As we mentioned earlier, SBA loans are one of the tightest when it comes to lending standards, so it’s no surprise that they require collateral.
If you are applying for an SBA loan, then you will be required to put up collateral to minimize the risk of lending to you. This can cause a lot of stress to some people, as they believe that poor collateral will prevent them from receiving an SBA loan.
But, in most cases you will not be denied an SBA loan simply because your collateral is inadequate. So what collateral will you need to be eligible for one of these loans?
The amount of collateral that the bank will want from you will hugely depend on the amount that you wish to borrow. The requirements for collateral are outlined in the regulations for SBA loans, and are listed as follows:
SBA 7(a) loans up to $25,000 - these loans do not require any collateral, so your lender will not ask for any.
Small SBA 7(a) loans ranging from $25,000 - $350,000 - for loans of this category, the amount of collateral required is determined by the lender, not the SBA. Most banks will have collateral policies in place for non-SBA business loans, and so they should follow these for SBA loans.
These collateral policies will usually include a lien on all the borrower’s fixed assets (real estate included), and a first lien on assets that are obtained through the loan.
Standard SBA 7(a) loans exceeding $350,000 - for loans of this size, the lender must aim to obtain as much collateral as possible, even up to the loan amount if applicable. The collateral for this is outlined by SBA regulations.
Are SBA loans secured or unsecured?
If you are new to business loans, then you might not be aware of the terms ‘secured’ and ‘unsecured’. You might think that these are a different thing to collateral, but generally speaking they refer to the same thing.
So let’s take a look at what ‘secured’ and ‘unsecured’ mean when it comes to small business loans.
In small business loans, a secured loan uses assets, or a single asset, as collateral. So, when you apply for a secured loan, you will be required to offer an asset to the lender.
Generally, you will give financial collateral, but most lenders will also take a lien on fixed assets if you haven’t got any liquid assets to offer.
This collateral is taken as extra protection for the lender, as they have something to cash in on if the loan they give you results in losses.
Whereas, an unsecured loan is a loan given without the lender taking any collateral from you. With these loans, it is not only you who is taking on a lot of financial risk, the lender is too.
This is why unsecured loans are a lot less common, and are generally reserved to loans that are only very small.
As we established earlier, the majority of SBA loans do require collateral, and so these would be considered secured loans. This applies to any SBA loans where the borrower is requesting anything above $25,000, with even more collateral required for loans exceeding $350,000.
But any SBA loans for money below $25,000 are actually unsecured as collateral is not required. So, SBA loans can be secured and unsecured, it all depends on how much you want to borrow.
Can goodwill be used as collateral?
Once upon a time, lenders did not require collateral for loans. Banks would offer mortgages for homes without requiring a deposit, and lenders would offer substantial loans to businesses without security.
Unfortunately, those days are long gone, and now most lenders will require collateral for pretty much any loan.
So, no, goodwill generally cannot be used as collateral for a business loan. Even if you have pristine intentions, and a perfectly designed business plan, goodwill simply isn’t tangible which is why it isn’t an appropriate form of collateral.
If the lender gives you a substantial loan, and the business fails, then they cannot recoup any losses through goodwill alone. This is why it is no longer taken as collateral. At least not for larger loans.
However, with smaller loans, you can essentially use goodwill as collateral. This is because the majority of lenders do not require collateral for what they perceive to be a small loan.
We mentioned this briefly earlier on when we looked at SBA loans beneath $25,000 as these do not require collateral from the borrower.
So, if you only want to borrow a figure beneath $25,000 then you can essentially use your own goodwill as collateral, as the bank will not ask for anything.
But for larger loans, it is not possible to use goodwill as collateral. Especially not for SBA loans. These types of loans are very tight in terms of regulations, so they will require sizable collateral for any loan higher than $25,000, and goodwill isn’t good enough.
How much collateral is needed for an SBA loan?
We’ve already briefly covered the collateral that you might need to put forward in order to obtain an SBA loan. But, let’s take a deeper look at what a lender might ask for, depending on the amount that you wish to borrow.
Before you apply for any loan, but especially an SBA loan, it is very important that you assess your current situation and the assets that you have.
No reputable lender is going to loan you a large amount of money on a whim, so you will need to put forward your own assets to secure your loan.
There are a lot of places that speak about the assets that you might need to use as collateral for an SBA loan, but very few that speak about this collateral in specifics. So let’s take a look at how much collateral you might be required to put forward for the amount that you want to borrow.
For an SBA loan, you might be required to put forward a variety of different assets as collateral, but most lenders will seek real estate. This is the reason that a lot of people put their house on the line to be able to achieve their business dreams.
However, you may also be able to put other assets forward for this loan, including equipment, inventory, undeveloped land, and receivable accounts.
The amount of collateral that you will need to put forward depends entirely on the amount that you are looking to borrow.
If you are borrowing any more than this you could be required to put up to 85% of your property’s value as collateral, and up to 50% of the value of other assets on the line. This ensures that you are just invested in the business as the lender is, so you both have something to lose.
In short, SBA loans will require collateral for any loan valued more than $25,000. Generally speaking, most lenders will take collateral by putting a lien on the borrower’s real estate for up to 80% of the property’s value.
But, the amount of collateral that they will take depends entirely on the amount that you are borrowing, so it is best to speak to your lender about this.