All of Your Collateral Questions Answered
All of Your Collateral Questions Answered
What are SBA’s collateral requirements?
SBA Collateral Requirements: 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.
The SBA has clearly defined loan property lien requirements:
For loans over $500,000 the SBA requires that a lien be placed on available equity of the borrower’s personal real estate including residential and investment property if the equity is 25% or more of fair market value.
The SBA does not require lenders to collateralize a loan with personal property if the borrower has less than 25% equity of fair market value.
Real estate can be valued at 85% of the market value for the calculation of “fully-secured.”
SBA does not require a lender to collateralize a loan with a personal real estate to meet the “fully secured” definition when the equity in the real estate is less than 25% of the property’s fair market value. However, an SBA lender is not prohibited from doing so.
What about assets owned by the business and spouse?
When an individual alone or together with his or her spouse owns 20% or more of the business, the lender must consider taking as collateral a lien on personal real estate (investment or residential) that is owned individually by the applicant owner, or jointly owned by the individual and his or her spouse.
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.
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)
Is my house required as collateral?
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 $500K 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.
What does it mean to have a UCC lien on business?
The lender will file a UCC-1 blanket lien against your business for all current and future business assets.
Can I use securities instead of my house as collateral?
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.
What happens if I sell my house while the bank has a lien on 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.