SBA Loans - San Diego
Lightning Commercial Funding
SBA Loan Collateral Discussion
Collateral is never a substitute for a full assessment by the Lender of the borrower’s ability to repay the loan in a timely manner. If the Lender’s analysis determines that the borrower lacks reasonable assurance of timely repayment from the earnings of the business, the loan request must be declined and not submitted to SBA for its guaranty.
There are two perspectives from which collateral must be viewed when dealing with an SBA loan; the SBA's perspective and the written policy of a given lender.
First, the SBA. For an SBA perspective, the borrower must ask, what type of collateral do I need for a loan?
Now the guest lenders point of view…
You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character; management capability, collateral and owner's equity contributions are also important considerations.
All principal owners of the business are required to personally guarantee the SBA loan. SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor. The statute says that all available collateral should be taken up to the point that collateral coverage is one to one, aka 1:1 DCC (debt collateral coverage.
From a lender's perspective, the collateral coverage is slightly different. First, the published collateral requirements for any given lender/bank's conventional loan programs must be exactly the same as far as liquidation values for its SBA loan programs.
Lenders view collateral at liquidation value as that is what they expect to receive if the loan defaults and they need to call in contractors to "control" the assets and then pay an auctioneer to dispose of them. Assets are in various categories. Basically real estate, equipment and cash items like accounts receivable.
Let's use real estate as an example. For most lender's (as all lender's are different), the liquidation value of commercial multi-use real estate or residential real estate is 80%. So for any property in these categories we would be the appraised market value times 80% and deduct after that any mortgages in the property to yield the liquidated value. Raw land is generally 50% and single purpose properties are 75%. Equipment that is new is in most cases 50% and used is generally 20%. Accounts receivable under 90 days is generally 80%, but based on review of the creditors.
Remember that no matter what the SBA guidelines state, it is the lender's money in all cases. So the lender generally decides the collateral requirement and then complies with SBA policy, not visa-versa.