SBA's rules for what a 7(a) lender must take as collateral and how each asset counts, such as improved real estate at 85 percent of value. A request must not be declined only for thin collateral.
For a Standard 7(a) loan, a loan is fully secured when the lender holds liens on all of the business’s available fixed assets, counted at SBA’s percentages, up to the loan amount. Improved real estate counts at no more than 85 percent of market value and unimproved at 50. New machinery and equipment count at 75 percent of price less prior liens, and used at 50 percent of net book value, or 80 percent with an orderly liquidation appraisal. Furniture and fixtures count at 10 percent. Receivables and inventory, if taken, count at no more than 10 percent of book value.
If the loan is not fully secured, the lender must take available equity in real estate that the owners and guarantors own personally. It need not do so where that property has under 25 percent equity, and the lien may be limited to the shortfall or to 150 percent of the equity. A vehicle under $20,000, or one already liened, needs no lien. A loan of $50,000 or less under 7(a) Small or SBA Express needs no collateral. SBA’s guaranty is no substitute for collateral the borrower has.
Example: a $500,000 loan, improved real estate worth $400,000 and new equipment priced at $100,000 with no prior liens. The real estate counts $340,000 and the equipment $75,000, a total of $415,000. The shortfall is $85,000.
How it shows up in the data here
The SBA loan file has CollateralInd, which shows only whether the lender reported the loan as backed by collateral. It does not show what the collateral is, its value or the lien position. The fully secured test is the lender's, run from its own appraisals and books, and is not published.
Go further
- Package checklist: SBA 7(a) loan: Where collateral sits in the order lenders ask.
- SBA 7(a) loan package checklist: A 7(a) package is the bank's usual file plus SBA's own list. Know which items SBA requires and you can have them ready before the first call.
- What to do after a bank says no to a business loan: One bank's no is one lender's answer, and the reasons are yours to ask for. They usually point to a constraint you can name.
Related terms
- SBA 7(a) loan: SBA's main business loan program. A lender makes the loan and SBA guarantees part of it: up to 85 percent of $150,000 or less and 75 percent of more, on loans up to $5,000,000.
- Equity injection (SBA): The cash or other equity an owner puts into an SBA-financed project. A 7(a) start-up or business purchase needs at least 10 percent of total project cost; a 504 project needs 10, 15 or 20 percent.
- Credit elsewhere test (SBA): SBA's rule that a loan is eligible only if the business cannot get some or all of the money on reasonable terms elsewhere. The lender must certify it and explain why in its credit memo.
- SBA CAPLines: SBA's 7(a) lines of credit for short-term operating needs, in four types: Working Capital, Contract, Seasonal and Builders. The most for one line is $5,000,000.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.