Article by Roger Schlueter, MBA
INFORMATION IN THIS SECTION WAS TAKEN FROM THE SBA SOP SECTION ON COLLATERAL.
Collateral for the SBA Guaranteed Loan, like the SBA 7a Loan, is definitely not the same as the amount of Collateral that banks usually get from the borrower. Usually, with a bank, the borrower must fully collateralize his or her loan. Actually it realy depends on what value the bank puts on the Collateral. The bank may value the collateral on a liquidation value that has a market value of probably, one hundred twenty five percent or more of market value.
SBA requests are not declined solely on the basis of Collateral. SBA is aware that most banks will use the program if they Lack Adequate Collateral on a Business Loan. Because of this most SBA Loans are usually not declined on the basis of Collateral. Banks decline Business Loans on the basis of Collateral all day long. SBA does expect the bank to use all available Collateral of the Business and also Personal Assets of the borrower to Collateralize the loan.
If the loan proceeds are used to purchase an asset, the SBA wants a first security interest in that asset. If the loan is to Refinance Existing Debt then the Security must be, at least, the same security as the debt being refinanced.
SBA conciders the loan to be “Fully Secured”, if the lender has taken all available assets and the liquidation value is equal to the loan amount.
Personal Residence as Collateral – SBA does not require the Borrower to pledge their residence if the equity is less that twenty-five percent. The bank on the other hand will want the house if there is no equity. Let’s face it nobody wants to move out of their house, equity or not.
SBA will try to take as collateral any asset that is available from the Borrower. The SBA will also expect the Borrower to pledge assets jointly owned by his or her spouse, even if the spouse has no interest in the business.
Guarantees – Bankers do not concider Guarantees as Collateral but the SBA has this section under the Collateral Section. SBA wants Unlimited Full Personal Guarantees from anyone with 20% or more ownership. SBA wants all spouses to sign an Unlimited Full Personal Guarantee. Anyone who changes their ownership to less than 20% within 6 months is still subject to the Unlimited Full Personal Guarantee unless fully divested of any ownership prior to the application. Anyone owning less than 20% can usually sign a Limited Personal Guarantee (Limited to an amount). If no one owns 20% or more then one of the owners has to give a Unlimited Full Personal Guarantee.
Appraisal Requirements – An Appraisal is required if the SBA Loan is Greater than $250,000 and is Collateralized by Commercial Property. Banks will probably get an Appraisal reguardless of the amount. The SBA has No Appraisal Requirements for Non-Commercial Real Estate securing a Personal Guarantee. Equipment Appraisals can usually be accepted with a Qualified Supplier or Dealer of said Equipment writing a letter stating the value and signing and dating the letter.
Please look at the SBA SOP for any Guarantee or Appraisal Questions that you have. This has been only a Summary and the SOP is more detailed and as such, More Confusing.
Please see my Website at www.schlueterfinancial.com for contact information and additional information.