Securing a business loan often involves collateral, providing lenders with assurance in case of repayment default. One common tool for securing business loans is a Uniform Commercial Code (UCC) lien. The lender will file a UCC-1 blanket lien against your business for all current and future business assets. A UCC lien is a legal document filed with the state government, granting the lender a security interest in specific business assets. Think of it as a claim on those assets.

What is lender lien position?

Lenders generally require to be in first lien position but only one lender can be. If a different lender is needed (or wanted) for your second loan, they will typically refinance your existing loan and roll it into the new loan. This places the new lender in first lien position.

SBA Collateral Requirements

SBA collateral rules aren't as straightforward as simply having enough assets to pledge. There's a mix of regulations and lender discretion involved, aimed at balancing risk mitigation with access to capital for diverse businesses.

An SBA loan request is never declined solely on the basis of inadequate collateral. In fact, one of the primary reasons lenders use the SBA program is for those applicants that demonstrate repayment ability but lack adequate collateral to repay the loan in full in the event of default.

A loan request is not to be declined solely on the basis of inadequate collateral. In fact, one of the primary reasons Lenders use the SBA-guaranteed program is for those Applicants that demonstrate repayment ability but lack adequate collateral to repay the loan in full in the event of default. However, SBA does not permit its guaranty to be a substitute for available collateral.

While the Small Business Administration (SBA) doesn't dictate specific collateral requirements for its loan programs, it does influence lender policies through its guarantee programs. This means lenders have some flexibility in determining what collateral they require, making the actual requirements you face a bit more nuanced.

Collateral for SBA 7(a) Loans

For Standard 7(a) loans, the Small Business Administration (SBA) deems a loan as "fully secured" when these conditions are met: all assets being acquired, refinanced, or improved with the loan are security-interested, and fixed assets of the applicant with a combined Net Book Value, as adjusted below, amount to the loan sum. The term "fixed assets" refers to real estate, machinery, and equipment owned by the business.

The valuation of these assets should follow these rules:

New machinery and equipment (excluding furniture and fixtures) should be valued at a maximum of 75% of their price without previous liens for the calculation of being "fully secured".
Used or existing machinery and equipment (excluding furniture & fixtures) should be valued at a maximum of 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of "fully secured".
Improved real estate can be valued at a maximum of 85% and unimproved real estate at 50% of the market value for the calculation of “fully secured”.
Furniture and Fixtures can be valued at a maximum of 10% of Net Book Value or appraised value.

In cases where collateral shortfall exists, the lender must take available equity in the personal real estate of any owners of the applicant and guarantors who own 20% or more, except Supplemental Guarantors. Liens on personal real estate may be limited to the amount of the collateral shortfall. Additionally, trading assets could be included as necessary (using no more than 10% of the current book value for the calculation).

The SBA does not necessitate a lender to collateralize a loan with real estate when the equity in the real estate is less than 25% of the property's fair market value. The lender is required to document the source used for determining less than 25% equity in their loan file.

When loan proceeds from a Standard 7(a) Loan will be used to acquire, refinance, or improve assets, a first security interest in those assets must be obtained. For loans collateralized by commercial real estate that was acquired, refinanced, or improved, lenders must obtain an appraisal that complies with real estate appraisal and business valuation requirements.

Additional requirements if debt refinance

When loan proceeds from a an SBA 7(a) loan will be used to refinance existing debt, the loan must be secured with at least the same collateral and lien priority as the debt that is being refinanced. When the debt being refinanced is considered to be over collateralized based upon SBA collateral requirements and the SBA loan will remain fully secured, the Lender may approve the release of excess collateral. Substitute collateral may be offered providing it is of comparable value and useful life and is determined to be acceptable by SBA the SBA lender. (See Debt Refinance page for more information)

Personal Property Collateral

When is personal collateral potentially required?

The SBA does not require borrowers to have equity in a house/property to qualify, but if the borrower does have such equity an SBA lender may have to use it for collateral if certain conditions exist.

The SBA does not require lenders to collateralize the loan with personal property if the borrower has less than 25% equity of fair market value.

It is an SBA requirement that for loans over $500K, if you have 25% equity in any personal real estate, including residential and investment property, that it be required as collateral, up to the full loan amount.

If a borrower is considering an SBA loan for more than $350K and has 25% or more equity in their home then getting a HELOC in place can bring the equity available to under 25% and therefore avoid a junior lien being placed on their home by the SBA lender.

Will a HELOC prevent a property from being collateral?

Any amount taken out in a Home Equity Line Of Credit is deducted from the 25% equity rule. If the property with a HELOC is being collateralized, then the SBA lender would be in third lien position, with the mortgage in first, and the HELOC in second.

Mitigating collateral requirements:

Real estate transferred by the applicant to a spouse or minor children within six months of the date of the application will not be exempt from consideration as available collateral.

If you take a HELOC before you officially apply for your SBA business loan, and the mortgage plus the HELOC leave you with less than 25% equity in your house or investment properties, then a lien will not be required.

Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, if there are tax implications associated with the lien amount in the particular state where the lien is filed.

Can I use securities instead of property?

If you are required to use property as collateral then you could instead replace with securities only if the collateral would cover the full amount of the loan. Whole Life Cash Value and Marketable Securities can’t be used in lieu of a residence, unless it fully secures the loan amount.

How would a house lien impact ability for a future HELOC?

You can refinance a collateralized house but no cash out refis are allowed.

While you can keep any existing HELOC in place, you would not be able to get a new HELOC after the SBA loan is funded.

What happens if I sell a collateralized property?

You would notify the lender of this. The process is that you sell the house and the mortgage lender gets paid off, your equity goes to the bank to be held in escrow, and they release the lien.

When you purchase another house/property this amount can be applied to your purchase and the lender will take a lien on the new house/property. If the equity is not applied to another house/property then it has to be applied to the SBA loan balance.

Business Loan Liens