Business Loan Collateral: What to Know
Business Loan Collateral: What to Know
When applying for an SBA loan to finance your small business or franchise—whether for a business acquisition or an international trade venture—you’ll need to pledge collateral to secure the loan. However, a lack of collateral won’t necessarily disqualify your application. The SBA emphasizes repayment ability, making its loan programs a great fit for businesses with strong cash flow but limited assets. Under the SBA SOP 50 10 8 guidelines (effective June 1, 2025), collateral requirements are flexible and focus on utilizing available business and personal assets. LoanBox ensures your loan package aligns with these standards, optimizing collateral to strengthen your chances of approval.
Understanding SBA Collateral Requirements
Collateral refers to property or assets pledged to secure an SBA 7(a) or 504 loan, giving lenders a way to recover funds in case of borrower default. The SBA strikes a balance between collateral and repayment ability, requiring lenders to take available assets without demanding full security for every loan.
Collateral Isn’t the Sole Barrier to Approval: A lack of collateral alone won’t lead to rejection if you can demonstrate strong repayment ability, such as a Debt Service Coverage Ratio (DSCR) of 1.15 or higher. This policy supports businesses like startups or service-based firms that might not have significant assets.
What Does “Fully Secured” Mean?: A loan is deemed fully secured when the lender takes security interests in all available fixed assets—such as real estate, machinery, and equipment—up to the loan amount. Valuation caps are applied to determine the adjusted net book value of these assets.
SBA loans provide a lifeline for businesses with great potential but limited resources. With flexible collateral rules and a focus on repayment ability, these loans open doors for growth—LoanBox is here to help you navigate the process and secure the financing you need to succeed.
SBA Collateral Guidelines
The SBA 7(a) and 504 loan programs have structured collateral requirements based on the loan amount and available assets. Business assets take priority over personal real estate when securing these loans.
Small Loans
7(a) Loans ≤ $50,000: Collateral is generally not required. However, lenders may choose to secure available business assets, such as equipment or receivables, based on prudent lending practices.
Example: For a $40,000 7(a) loan aimed at working capital, collateral may not be necessary if the borrower demonstrates strong repayment ability.
Larger Loans
7(a) Loans > $50,000: Lenders must secure all available business fixed assets (e.g., real estate, machinery, equipment) up to the loan amount, taking a first security interest in assets financed by the loan. Collateral valuation follows these caps:
New machinery/equipment: Up to 75% of the purchase price (minus existing liens).
Used machinery/equipment: Up to 50% of net book value, or 80% if supported by an orderly liquidation appraisal (minus liens).
Improved real estate: Up to 85% of appraised value.
Unimproved real estate: Up to 50% of appraised value.
Furniture/fixtures: Up to 10% of net book or appraised value.
Trading assets (e.g., receivables, inventory): Up to 10% of current book value, at the lender's discretion.
Vehicles: Any vehicle valued at more than $10,000 requires a lien. Valuation can be determined by an independent appraisal, a valuation service, or the purchase price if the vehicle is financed. All details should be documented in the credit memorandum.
Example: A $200,000 7(a) loan for a business acquisition could be secured using purchased equipment (valued at 75% of its $150,000 purchase price) and inventory (10% of $100,000 book value).
Loans Exceeding $350,000
Personal Real Estate: If business assets are insufficient to fully secure the loan, lenders must take liens on personal real estate (residential or investment) owned by individuals with a 20% or greater ownership stake in the business, provided the property has at least 25% equity (appraised value minus outstanding liens). The lien is limited to 150% of the collateral shortfall.
Equity Calculation: Equity = Appraised value – Outstanding liens. For example, a home appraised at $500,000 with a $350,000 mortgage has $150,000 in equity (30%), which would meet the requirement for a lien.
Appraisal Requirements: For commercial real estate collateral, an independent appraisal by a state-licensed or certified appraiser is mandatory (certification required for properties appraised over $1,000,000). The appraisal must comply with Uniform Standards of Professional Appraisal Practice (USPAP) and be dated within 12 months of the loan application. Non-commercial real estate (e.g., residences) does not require an appraisal unless deemed necessary by the lender.
Less Than 25% Equity: Properties with less than 25% equity are not required for collateral. However, lenders may include them at their discretion, provided the equity source is documented in the loan file.
Example: A $400,000 7(a) loan for a franchise acquisition might be secured with $250,000 in business assets and a second lien on the owner’s home, which has $150,000 in equity (30%). A rental property with only $50,000 in equity (10%) would not be required, though the lender could choose to include it.
These guidelines are designed to balance the needs of borrowers and lenders, ensuring loans are secured appropriately while supporting business growth.
Lien Priority Guidelines:
Business Assets: Lenders will secure a first lien on financed or business-owned fixed assets. If assets are tied to existing debt that cannot be refinanced, a subordinate lien may be permitted, provided the terms of the existing debt are reasonable.
Personal Real Estate: To address collateral shortfalls, lenders may take a first lien or a second lien (subordinate to existing mortgages) on personal real estate, ensuring protection and priority in the event of default.
Prohibition of Piggyback Financing: The SBA strictly prohibits loan structures where an SBA-guaranteed loan holds a junior lien behind a non-SBA loan for the same purpose, approved within 90 days. This policy ensures lenders do not gain undue preference.
Learn about house and personal property collateral requirements here: House Collateral and SBA Loans in 2025
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