The Small Business Administration normally mandates that applicants provide collateral for an SBA loan. The Small Business Administration demands collateral in order to have a second source of loan repayment in the case of a loan default. Collateral can consist of business assets as well as personal things you possess.
The total amount collateral that is required to get an SBA loan depends upon a number of factors. A big thing that can raise or reduce your collateral requirements is the percentage of capital supplied by the owners. Loan companies will often demand considerably less collateral if you are putting up forty percent of the financing needed to fund your company as opposed to ten percent.
One other case where you will not be required to furnish as much collateral for an SBA loan occurs when you’re buying an existing company. A company that has been operating for many years has got a proven financial history. An already existing company is going to have financial statements that can reveal there’ll be adequate cash flow to make a profit and also have enough left over to cover the payment of the extra financial obligation.
Let’s examine what sort of property may be used as collateral for an SBA loan. Generally presume that every one of the properties and assets which are purchased with the loan proceeds are going to be utilized as collateral. Generally, the next asset group which is used as loan guarantee are business properties and assets. This could include raw land, real estate, trucks, heavy equipment, machinery, your A/R, furniture, fixtures and non-perishable merchandise.
The SBA will require that personal assets be used to collateralize an SBA loan when there are insufficient business assets to meet the collateral requirements. The kind of personal assets that can be used to collateralize an SBA loan are things like your home equity, stocks and bonds and certificates of deposit. The SBA does not allow you to use your jewelry, your personal automobile or your retirement funds as collateral for an SBA loan.
It is important to know that the value given to the assets used as a guarantee to get an SBA loan will not be based upon current market value. The reason why this is done, is mainly because if there is a loan default the majority of these properties and assets will be liquidated for significantly less than they’re worth at an auction. For that reason, the collateral value of your home equity will be 20% less than its true value. The collateral value is 50%, for trucks, heavy equipment, furnishings and accounts receivables. The collateral value of bonds and stocks ranges between fifty to ninety percent. Stocks and bonds have a collateral value that ranges between 50 to 90%. Certificates of deposit is the only asset whose collateral worth is the same as it’s stated value if it’s utilized as collateral for an SBA loan.
Your SBA loan provider will compute a collateral coverage ratio as part of the loan evaluation procedure. This ratio is determined by dividing the total discounted collateral value by the total loan request.
One other way that the Small Business Administration defends itself from default on SBA loans is by demanding that owners that own twenty percent or more of the business must give a personal guarantee of repayment. Individuals who have key management positions are also required to furnish a personal guarantee of repayment of the loan. Whether a guarantee is secured by personal properties and assets, or not, is based on the worth of the assets already pledged.
In conclusion, always anticipate that you’ll have to supply collateral if you submit an application for an SBA loan. If you don’t have a sufficient amount of company or personal properties and assets to fulfill the lender’s collateral demands, you will need to contact relatives, friends or business associates to see if they will be willing to put up collateral. If you’re unable to identify additional sources of collateral, you may have to scale back your business plan. By cutting down your money needs, you can cut down the collateral that is going to be needed to get an SBA loan. Subsequently, you can request further financing once you’ve got a more well established financial history plus more assets which can be used as collateral.
Dealing with an SBA lender that is knowledgeable about the SBA process, can significantly boost your chances of getting an SBA loan. You aren’t required to use a preferred lender, but if you have the choice, it will make all the difference in the world. One major provider of SBA loans you should seriously consider is Newtek, the “Small Business Authority.”” Newtek is the largest non-bank provider of SBA government guaranteed loans. You can obtain access to an application for an SBA loan from Newtek by going to FundingNewBusiness.com. After filling out your application, you can usually be pre-qualified in as little as 48 hours. The application process is easy. Newtek compiles all of the paperwork for your SBA loan for you. Get access to financing for as much as five million or as little as fifty thousand dollars today!
Written by: Mark J. Krupp, Cofounder of NewBusinessCreator.com