By James | Fast SBA
Quick answer: SBA loans do not always have to be fully covered by collateral. For a standard 7(a) loan, the lender generally takes a lien on the business assets being financed and other available business fixed assets. If those assets do not fully secure the loan, owners may have to pledge available equity in personal real estate. A lack of enough collateral should not be the only reason an otherwise sound request is declined, but the SBA guarantee is not a substitute for collateral you actually have.
Collateral rules vary by SBA program, loan size, use of funds and lender policy. Before you apply, ask the lender what liens and guarantees it expects for your specific request.
Collateral, a personal guarantee and a down payment are not the same thing
These terms are easy to mix up:
- Collateral is property the lender can place a lien on, such as business real estate, equipment or sometimes a home.
- A personal guarantee makes the guarantor personally responsible for the debt if the business does not pay. It is broader than a lien on one named asset.
- A down payment or equity injection is money the borrower puts into the project. It reduces the amount borrowed but does not replace collateral or a guarantee.
SBA rules generally require each individual who directly or indirectly owns 20% or more of the applicant business to provide an unlimited personal guarantee. Other people or entities may be asked to guarantee when needed for credit or other reasons.
That does not mean every 20% owner automatically pledges a home. The guarantee and the lien decision are separate parts of the loan structure.
What collateral does a standard SBA 7(a) lender take?
For a standard 7(a) loan, the lender starts with the assets connected to the business and the transaction.
1. Assets bought with the loan
When loan proceeds are used to buy, refinance or improve an asset, the lender generally takes a security interest in that asset. Examples include:
- commercial real estate;
- machinery and equipment; and
- vehicles when the applicable lien and value rules require it.
This is why a real estate loan normally has a mortgage on the property and an equipment loan normally has a lien on the equipment.
2. Other available business fixed assets
The lender reviews the applicant’s available fixed assets, including business real estate, machinery and equipment. It may file a blanket lien that covers multiple business assets rather than naming only one item.
SBA does not give every asset its face value when deciding whether a loan is fully secured. Under the current SOP, the calculation discounts assets. For example, new machinery and equipment may be counted at no more than 75% of price, while used equipment is normally counted at a lower percentage unless supported by an orderly liquidation appraisal. Improved and unimproved real estate are also discounted for this calculation.
Inventory and accounts receivable are treated differently from fixed assets. The lender has discretion over whether to take a security interest in these trading assets, and SBA gives them limited value in the fully secured calculation.
3. Personal real estate when there is a collateral shortfall
If the available business assets do not fully secure a standard 7(a) loan, the lender may have to look at available equity in personal real estate owned by co-borrowers, 20% or greater owners and guarantors.
That can include:
- a primary residence;
- investment property; and
- other personally owned commercial real estate.
SBA does not require a real-estate lien to meet the fully secured definition when equity is less than 25% of the property’s fair market value. The lender has to document that conclusion. When a lien is taken, it may be limited to the collateral shortfall, and SBA rules also allow certain limits tied to the property’s equity.
A jointly owned home can add another step. A spouse or other co-owner may need to sign documents when required to create a valid lien. That does not automatically make the spouse a full personal guarantor.
Can you get an SBA loan without enough collateral?
Yes, sometimes.
SBA’s current operating rules say a loan request should not be declined solely because collateral is inadequate. The program is partly designed for businesses that can repay a loan but do not own enough assets to cover the balance in a liquidation.
But this is not the same as an unsecured-loan promise. The lender still has to take the collateral SBA rules require, and the SBA guarantee cannot replace available collateral.
The key question is repayment ability. Collateral is a secondary source of repayment if the loan defaults. Strong collateral does not repair weak cash flow, and weak collateral does not necessarily defeat a request with well-supported cash flow.
What about SBA loans of $50,000 or less?
For 7(a) Small and SBA Express loans of $50,000 or less, SBA does not require the lender to take collateral.
That does not mean every loan at or below $50,000 is automatically unsecured. The lender may have its own policy, and special circumstances can matter. A refinance, for example, may need to retain collateral and lien priority from the debt being refinanced.
For loans above $50,000, the lender’s collateral practices and the specific SBA product become more important. SBA Express lenders generally follow their written collateral policies for similarly sized non-SBA commercial loans to the maximum extent practicable.
How collateral works for an SBA 504 loan
An SBA 504 loan is built around major fixed assets, usually owner-occupied commercial real estate or long-life equipment. The project property is the main collateral.
The third-party lender normally has the first lien. SBA, through the Certified Development Company structure, usually has the second lien on the project property. SBA says that second lien will generally be considered adequate, although the CDC reviews the property’s value, restrictions and the strength of the business.
If the 504 loan is not fully collateralized by business assets, available personal assets may have to be pledged to support the guarantee. Leasehold-improvement projects can also require extra attention because leasehold improvements may have little liquidation value.
Read our SBA 504 loan guide for the program’s structure, eligible uses and borrower contribution rules.
Will the lender put a lien on your house?
Possibly, but not in every case.
A home lien is more likely when:
- a standard 7(a) loan has a collateral shortfall;
- a 20% or greater owner or guarantor has meaningful available home equity; and
- the lender needs that equity under SBA rules or its prudent lending policy.
It is less likely when the loan is already fully secured by business assets or the equity in the home is below the applicable threshold. Smaller 7(a) Small and SBA Express loans also have different collateral rules.
Do not rely on a verbal statement that “SBA does not take your house” or that “SBA always takes your house.” Both are too broad. Ask for the proposed collateral schedule and identify every property and lien before closing.
What happens to the collateral if the business defaults?
A lien gives the lender rights in the pledged property after a default, subject to the loan documents and applicable law. The lender can pursue business collateral, enforce guarantees and, when a valid lien exists, pursue the pledged personal property.
The SBA guarantee protects the lender for an agreed portion of eligible loss. It does not cancel the borrower’s debt, release guarantors or prevent collection against collateral.
This is why every borrower should review the note, security agreement, guarantee and any mortgage or deed of trust before signing. Ask a qualified attorney to explain anything you do not understand.
Questions to ask before you apply
Ask the lender or SBA advisor these questions early:
- Which SBA product and collateral rules apply to this request?
- Which business assets will carry a lien?
- Will the lender file a blanket lien on business assets?
- Is the loan fully secured under SBA’s discounted values?
- If there is a shortfall, which personal real estate will be considered?
- Who must provide a personal guarantee?
- Will a spouse or co-owner need to sign lien documents?
- What appraisal, title or filing costs should I expect?
A specific collateral answer is more useful than a yes-or-no promise.
The bottom line
You do not necessarily need enough collateral to cover every dollar of an SBA loan. You do need to pledge the collateral required for the program and transaction, and owners with meaningful personal real-estate equity may be asked to support a shortfall.
Start with cash flow, then map the collateral. A lender wants to see that the business can make the payment. The liens and guarantees protect the lender if that plan fails.
Fast SBA is not a lender. We match business owners with independent SBA advisors who can review the request and explain what a lender is likely to require. Get pre-qualified if you want help assessing your options.
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Frequently asked questions
Do SBA loans require collateral?
Many do, but an SBA loan does not always have to be fully secured. The lender generally takes liens on assets financed with the loan and other available business assets. If a standard 7(a) loan still has a shortfall, available personal real-estate equity may also be required. SBA says inadequate collateral should not be the sole reason to decline an otherwise sound request.
Can I get an SBA loan without owning a home?
Yes. Homeownership is not a universal SBA loan requirement. The lender first evaluates repayment ability and the business assets available for collateral. If you do not own a home, the lender cannot place a lien on one, but it can still require the available collateral and guarantees that apply to the loan.
Will an SBA lender put a lien on my house?
It may. For a standard 7(a) loan that is not fully secured by business assets, the lender may need to take available equity in personal real estate owned by certain borrowers, 20% or greater owners and guarantors. SBA does not require a real-estate lien for the fully secured calculation when equity is less than 25% of fair market value.
Is a personal guarantee the same as pledging collateral?
No. A personal guarantee makes the guarantor personally responsible for the debt. Collateral is specific property subject to a lien. A borrower can sign a personal guarantee without pledging a particular home, although the lender may require both a guarantee and liens.
Do SBA loans under $50,000 need collateral?
For 7(a) Small and SBA Express loans of $50,000 or less, SBA does not require the lender to take collateral. Lender policy and special circumstances, including refinancing existing debt, can still affect the final structure.