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What are the 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 borrowers 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 is valued at 85% of the market value for purposes of 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.

Loans under $500K no personal property, over $500K and 25% equity then…

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 $500,000 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 $500,000 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 help me avoid using my house as collateral for a loan?
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.

How would house lien impact ability for 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.

Can I use securities instead of my house if required?
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 cannot be used in lieu of a residence, unless it fully secures the loan amount.

Which insurance policies do banks require for business loans?

Business loans require the borrower to have certain insurance policies in place. These requirements vary depending on a number of factors including but not limited to lender credit guidelines, loan type, loan amount, industry type, etc. These factors will in turn dictate the insurance policy requirements, including coverage amounts, certificates and document specifications, and ongoing policy requirements.

SBA lenders have both their own internal policies, along with SBA requirements to contend with. While SBA requirements are of course not applicable to commercial non-SBA lenders, their policy requirements can be just as extensive and in some cases, even more, cumbersome than what SBA lenders require.

For loans under $500,000 the SBA defers to the lender internal insurance requirements. For loans above this these are the required policies.

Life Insurance: Most business loans will require a life insurance policy - typically known as key-man or loan guarantee coverage - for the amount of the loan to protect the lender should the borrower pass away during the term of the loan.

General Liability: Commercial General Liability insurance policy is required to cover bodily injury, death and property damage.

Errors & Omissions: When applicable professionally) Certificate of Errors and Omissions -E&O insurance in an amount of not less than the loan amount for protection against claims relating to the professional services provided by the Guarantors and the Borrower.

Workers Compensation: Certificate of Statutory workers compensation insurance required for employees in connection with the advisory business - if there are employees.

Hazard Insurance: Various forms of hazard insurance and clauses may also be required - specifically if real estate is being taken as collateral or if there are substantial tangible business assets. Commercial non-SBA lenders will typically have fewer requirements than with SBA loans.

What if I cannot qualify for life insurance?
You can typically get around a borrower who is ineligible for life insurance with an SBA loan. In this case, an insurance rejection letter and continuity/succession plan is required.

Can insurance requirements delay my SBA loan?
Yes, these are required funding documents.

What is an unconditional guaranty?
An Unlimited Personal Guaranty is where the borrower/guarantor is guaranteeing the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting on the loan. Individuals who own 20% or more of the borrowing business must provide an unlimited full personal guaranty. Lenders may require other individuals to guarantee the loan as well. The guaranty by owners of less than 20% may be limited or full. All individuals guaranteeing the loan must provide a personal financial statement. Guaranty may be secured or unsecured but must meet SBAs collateral requirements. For loans over $500,000 if the loan is not fully collateralized by fixed assets or by the equity value of your practice, available equity in personal real estate must be pledged if you have 25% or more equity.

Am I the guarantor or the business for SBA loans?
SBA loans cannot be made solely to an individual. The business must be either the Borrower or a Co-Borrower.

Who has to guaranty a franchise business loan?
For a sole proprietorship, the sole proprietor. For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm, or any partner that is involved in management of the applicant business. For a corporation, all owners of 20% or more of the corporation and each officer and director. For limited liability companies (LLCs), all members owning 20% or more of the company and each officer, director, and managing member. Each loan must be guaranteed by at least one individual or entity. If no one individual or entity owns 20% or more of the Applicant, at least one of the owners must provide a full unconditional guaranty. Individuals who own 20% or more of an Applicant must provide an unlimited full guaranty. When ownership interest of an Applicant is held by a corporation, partnership or other form of legal entity, the ownership interests of all individuals must be disclosed. When deemed necessary for credit or other reasons, the SBA Lender, may require other appropriate individuals or entities to provide full or limited guaranties of the loan without regard to the percentage of their ownership interests, if any.

Does my spouse need to guaranty my loan?
If the spouse does not own any percentage of the borrower business then the spouse does not have to guarantee the loan. For less established borrowers whose loan is borderline for approval, a spouse who generates income can be added as a guarantor to help push the loan over the approval line with the lender. For SBA loans, if a spouse of an owner owns any percentage, and the spouse equity and the owner equity combined equals 20% or more, the spouse also has to be a guarantor. So, if an owner has 19% equity and their spouse has 1% equity then both must be guarantors.

Is the SBA guaranty for the lender or the borrower?
The SBA guaranty is for the lender not the borrower. If you default on the loan and the SBA pays the lender the guaranty, they will still be going after you for the full amount of the default or a negotiated payoff amount.

What happens if a trust is involved with the loan?
If the entity that owns 20% or more of the business is a trust (revocable or irrevocable), the trust must guarantee the loan with the trustee executing the guaranty on behalf of the trust and providing the required certifications. In addition, if the trust is revocable, the trustee also must guarantee the loan. Financial statements are necessary to determine the assets available to support the guaranty.

Can an owner reduce equity to avoid guaranty?
For SBA loans, any person subject to the personal guaranty requirements six months prior to the date of the loan application would continue to be subject to the requirements even if that person has changed his or her ownership interest to less than 20%. The only exception to the six-month rule is when that person completely divests his or her interest prior to the date of application. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the business in any capacity, including being an employee (paid or unpaid).

What happens to a guarantor if the loan defaults?
If you default and the SBA pays off the bank guarantee on your loan, this has nothing to do with your debt in the efforts taken to collect on the debt or garnish wages. The SBA guaranty is not for you. It is to cover the bank losses, not yours. If your bank loan is 75% guaranteed by the SBA this does not mean if you default YOU do not have to pay back 75% since it was guaranteed. You will. The bank likely sells your debt to a collection agency type outfit that you will have to contend with.

What documents are needed from guarantors?

SBA Guaranty Documents Include:

• Personal Financial Statement on all owners of 20% or more (including the assets of the owners spouse and any minor children), and proposed guarantors.

• Business financial statements and/or tax returns. Documents include:

o Year End Balance Sheet for the last three years, including detailed debt schedule

o Year End Profit & Loss Statements for the last three years

o Reconciliation of Net Worth

o Interim Balance Sheet

o Interim Profit & Loss Statements

o Affiliate/Subsidiary financial statement

What does it mean to have a UCC lien?
The lender will file a UCC-1 blanket lien against your business for all current and future business assets.

The SBA requires a personal guaranty from the majority owner(s) of all 7(a) loans, except in limited circumstances. However, the SBA recognizes that some borrowers may not have the personal assets to qualify for a personal guaranty. To address this issue, the SBA is implementing a new policy that allows for substitution of personal and/or corporate guaranty liability.

Policy: Lenders may allow a substitute guarantor to assume the liability of a personal or corporate guaranty, as applicable, for the guarantee of the individual and/or entity that is being substituted. To be eligible for substitution of personal and/or corporate guaranty liability, the substitute guarantor must have a similar or greater value and the personal/corporate guaranty liability agreement or transfer agreement must be submitted to the SBA Lender as part of the complete loan package.

Procedures:

1. Lenders may allow a substitute guarantor to assume the liability of a personal or corporate guaranty, as applicable, for the guarantee of the individual and/or entity that is being substituted.

2. To be eligible for substitution of personal and/or corporate guaranty liability, the substitute guarantor must have a similar or greater value.

3. The personal/corporate guaranty liability agreement or transfer agreement must be submitted to the SBA Lender as part of the complete loan package.

Examples:

• A small business owner could have their spouse or parent assume the liability of their personal guaranty.

• A small business could have a corporate shareholder assume the liability of the guarantor.

• A small business could have a third-party entity, such as a small business development center (SBDC), assume the liability of the guarantor.

What is a UCC Lien?
A Uniform Commercial Code (UCC) lien is a legal document that gives a creditor (like a bank) the right to seize and sell certain assets of a debtor (like your business) if the debtor defaults on their loan.

Why will the bank file a UCC lien on my business?
Banks typically file UCC liens on businesses to protect their lending interests. It gives them priority over other creditors if your business goes bankrupt or defaults on multiple loans. Think of it as the bank putting a "claim" on your assets, ensuring they're first in line to get paid if things go south.

What assets can a UCC lien be filed on?
The specific assets covered by the UCC lien will be listed in the document itself. It can include things like:

• Inventory

• Equipment

• Accounts receivable

• Intellectual property (like patents or trademarks)

• Real estate (if you're using it as collateral for the loan)

What does this mean for my business?
Filing a UCC lien won't have a major impact on your day-to-day business operations. You can still use and manage the assets covered by the lien. However, there are a few things to keep in mind:

• You cannot sell or dispose of the assets covered by the lien without the bank's permission.

• If you default on your loan, the bank can seize and sell the assets to recoup their losses.

• The UCC lien will be publicly recorded, which could potentially affect your business credit score.