Before getting into the specifics of collateral for SBA loans, it’s important to understand its key role in the lending process. Whether you’re a start-up small business owner, or a seasoned entrepreneur, understanding the concept of collateral can impact your ability to secure financing and managing the risks of it.
In finance, collateral is a buzzword heard often. Collateral is simply defined as pledging something of value as security, which may be forfeited in the case of default on a loan. It’s thought of as added “skin the in the game” to ensure a borrower repays his or her loan. The specifics of pledging collateral for an SBA loan depend on your lender and financing request. In this article, we’re highlighting the key elements of collateral for a small business loan at Live Oak Bank.
- At Live Oak Bank, we are primarily a cash-flow lender and view collateral as a last resort in repaying an SBA loan. We first ensure that cash flow is sufficient to repay the proposed debt. Live Oak calculates cash flow by looking at the revenue of the business, then subtracting expenses and operating costs. Then, we look at collateral. Certain collateral requirements need to be met depending on the loan product, size and use of funds.
- Some common examples of collateral that could be required are personal residences, retirement accounts, commercial real estate, equipment and commercial vehicles. Accounts receivable and inventory could also be considered collateral in some instances. These are specified assets used as security for the loan.
- All assets financed with loan proceeds must be included as collateral. If the loan is not considered fully secured by business assets alone, the SBA requires individuals to pledge personally held real estate when the equity in the property exceeds 25% of its value. As an example, let’s say a borrower owns a home worth $400,000. The borrower owes less than $300,000. This property has 25% or more equity. Therefore, SBA would consider that property required secondary collateral if the loan is not fully secured with business assets alone.
- There is a difference between a personal guarantee and collateral. Both of these elements are an important part of the business loan but will be required in different circumstances. For SBA loans, personal guarantees are required from every owner with 20% or more of the business, and potentially from individuals who hold key management positions. A personal guarantee is a promise to repay the loan with personal assets if the business defaults, whereas collateral is a specific asset used as security for the loan.
- Lean on your Live Oak lender to help you navigate and understand these requirements for an SBA loan. If your business is robust with a history of strong cash flow, there may be less of a need to pledge collateral. Be sure to discuss your options with your lender as these situations can be different for every borrower. Our team is comprised of product and industry experts who will help customize a loan to meet your needs.
Live Oak stands out as being a cash-flow lender, which is not the norm when it comes to small business lending. We consider collateral for a business loan as a secondary means of repaying the loan, which can benefit our borrowers. However, it’s important to understand when collateral is required and what assets may be pledged for SBA loans. We’re here to serve as your guide and partner throughout the lending process.
Learn more about Live Oak's small business loan offerings by visiting our site.
