Collateral Requirements:

Does the lender consider my business as collateral?

Lenders will place a UCC-1 blanket lien on your business and the cash flow of your business is what they are counting on to secure the loan. They will also require a personal guarantee from the borrower(s). However, neither are considered as traditional bank collateral. For conventional lenders this is enough, for SBA lenders additional collateral may be required (if available).

When would I be required to use my house or personal property as collateral?

• Conventional lenders as a general rule do not require personal property for collateral
• 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. This means in some cases multiple properties could have a junior lien applied to it by the lender.
• SBA does not require lenders to collateralize the loan with personal property if the borrower has less than 25% equity of fair market value.
• The SBA does not have personal property collateral requirements for loans under $350K but some SBA lenders have internal policies that will cause them to require the property as collateral.
• For SBA loans considered marginal or borderline, the bank may require the property as collateral even if the SBA isn’t mandating it. For example, if a loan is a 1.15 DSCR, 625 credit score, and had a BK 7 years ago, the lender may require to collateralize available property.

Are there any states where a SBA lender wouldn’t take my house as collateral regardless of how much equity?

Texas is the only state that our SBA lenders will not collateralize the borrower’s primary residence even if they own the house outright. However, additional properties owned where 25% equity is available, the SBA lender may attempt to collateralize those.

If I am having to use property equity as collateral do I still need life insurance?

The SBA lenders will be fully collateralized by either real estate property, life insurance, or a combination of both. The amount of equity in your property is deducted from the life insurance requirement. If the loan is fully collateralized with the property no life insurance would be required.

What are key factors to know if it is commercial real estate being used as collateral?

• The costs to the borrower are significantly higher for collateralized commercial real estate.
• The appraisal can cost $2,000 or more and if the loan amount is over $750K a phase 1 environmental report is also required which can cost around $1,500.
• If the property used to be a dry cleaners or a gas station even 20 years ago, a phase 1 environmental report is required.
• Appraisals and title work take about twice as long as a residential property.

My house qualifies as required collateral, can I use marketable securities or whole life cash value as collateral instead?

This is unusual but can be done only if 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 much does the title work costs?

The cost of title work depends on the value of the property, but is generally about $1,500. Some state have UCC filing taxes or mortgage taxes, these can significantly increase the cost of closings, New York and Florida are the most prominent mortgage tax states, and Tennessee also has a UCC filing tax.

Who pays for the property appraisals and title work?

The borrower. The bank orders and handles this but is usually part of what a deposit is applied for.

Will lenders release liens on properties when the loan is paid down enough?

A common borrower question in the case when multiple properties are collateralized is if the bank will drop a property when the loan amount is paid down to the point that the lender would no longer be required to maintain one of the properties as collateral.

Lenders may share that they will “work with you” on this and that they would be “open to looking at it at that time.” We know of cases that this worked out and others that it didn’t. In both scenarios, it wasn’t an easy process. Lenders resist giving up collateral on active loans even if the borrower considers it over-collateralized. For SBA loans, since the loans are generally unsecured except business assets, lenders won't outright release collateral.

What if my deal doesn’t cash flow high enough but I’m able to fully collateralize the loan amount with real estate equity?

For the conventional and SBA lenders we work with, if the loan doesn’t cash flow to meet the lender’s minimum DSCR then the loan doesn’t get done. The SBA mandates that the loan must cash flow with a minimum 1.15 DSCR. The SBA also does not allow a loan that doesn’t cash flow over their minimum to be approved even if it is fully collateralized. However, for loan cash flows bith the current and purchased business are combined.

What if my property still has a mortgage?

Most properties that are collateralized in SBA loans we deal with has an existing mortgage. The lender providing the mortgage is in first lien position. The SBA lender comes in at second lien position, or third position if there is a HELOC.

What if I have a HELOC?

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.

If my house is being used as collateral, will I be able to refinance or get a HELOC after the SBA loan is funded?

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 my house is being used for collateral but I want to sell it?

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.

How can I avoid not having to put my house as collateral?

• If you are at 25% equity but get a HELOC before you apply for the SBA loan, you may get under the 25% equity requirement.
• You can quick deed the property to another person (check with your mortgage lender first) other than your spouse, up to just before you apply for the SBA loan.
• You can quick deed the property to your spouse as long as it is filed 6 months prior to applying for the SBA loan.

If my house is being collateralized does my spouse have to sign anything?

The signature of the spouse would only be required on the specific collateral document if the spouse is also on the title.

My spouse does not own equity in my business but co-owns my house, will my spouse have to guarantee?

The spouse would not have to be a co-borrower or a personal guarantor of the loan. For a spouse that does not own equity in the business, the signature of the spouse is only required on the appropriate collateral documents. The spouse’s guaranty secured by jointly held collateral will be limited to the spouse’s interest in the collateral.

Why am I being “penalized” by the SBA for having equity in my house?

It can be frustrating to have to use your house/property for collateral when you know that the bank would approve your loan without it if you didn’t have the property equity.

The SBA helps advisors without collateral to still get a loan but requires those that have collateral, and enough of it, to be collateralized. The SBA is trying to walk the line of balancing the assistance to small business owners without property collateral to get funding, with their responsibility to the U.S. tax payer who will be on the hook (so to speak) for a loan default.