One of the downfalls of SBA loan programs is that small businesses will often have to put up collateral to secure their loan. While this might be intimidating for some small business owners or first time SBA loan applicants, there are many different types of collateral available that can help to secure an SBA loan. Many of these types of collateral are things that are already ready and available just from operating a small business.
A wide range of collateral can be used to secure an SBA Loan. While different asset classes are considered, some will hold more value than others. Some of the types of collateral that can be used for SBA loans are: machinery and equipment; accounts receivable; inventory; commercial real estate; residential real estate; investment properties; and marketable securities.
Machinery and Equipment
Considered a hard asset, machinery and equipment are favorable assets for SBA lenders. By taking the make, model, year, and the condition of the equipment into consideration, an SBA lender will have the ability to assign a value to the equipment. One of the reasons that machinery and equipment are commonly used by small businesses owners for collateral to secure SBA loans is because these assets are already available and being used by the business.
For most SBA loans, the typical advance rates or loan-to-value (LTV) assigned to equipment and machinery is 60% of the forced liquidation value (FLV). This means that an SBA lender will provide availability based on what they would be able to sell the equipment for in the event of a default.
Accounts Receivable (A/R)
A/R, or accounts receivable, is money that is owed to a company after a sale has been made or services have been rendered to their clients. Basically, if a small business provides goods or services to their clients but often wait for the clients to make payments on invoices or for their contracts, the money owed to the small business can be used as collateral to secure an SBA loan.
For most SBA lenders, the A/R that a company has to offer is not as favorable as hard assets, like machinery or equipment. The typical loan-to-value (LTV) for A/R is 20% of the outstanding accounts receivable. This can vary based on the credit quality of the applying business’s clients, the payment terms that are offered, and the diversification of their client base. SBA lenders are often willing to carve out or release their security interest in accounts receivable. SBA Lenders will do this to enable a factoring company or an invoice financing lender to provide a revolving line of credit in addition to an SBA Loan.
Although inventory is a tangible asset that might hold value to an operating business, inventory is not always as valuable to an SBA Lender. The type of inventory, the ease of liquidation, and the location of the inventory will all play major roles in determining the advance rate or LTV that an SBA Lender will provide when using inventory to secure an SBA loan. For example, a company that manufactures their own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective, the faster and easier they could sell the inventory, the higher the liquidation value they will assign.
Commercial Real Estate
Commercial real estate, or CRE, is a hard asset for small businesses and a great form of collateral for an SBA Loan. Real estate is not as liquid as equipment, A/R, or inventory, but can will provide a stable asset for an SBA lender to lend against. Like machinery or equipment, small business owners often utilize real estate to secure SBA loans because the real estate is tied in with the function of the business.
Additionally, unlike asset-based lending, SBA loans that have commercial real estate pledged as collateral have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first lien mortgage on commercial real estate, however, this is not the case with SBA lenders. SBA Loans can be secured by a second lien on commercial real estate. For example, if a property’s appraised value is $1,000,000 and they have a bank real estate loan for $500,000, an SBA lender can still use the real estate as collateral. An SBA lender will use the remaining $500,000 of equity as collateral for an SBA Loan.
Residential Real Estate
Depending on the lender, residential and personal real estate may also be applied as collateral to help secure an SBA loan. However, for traditional loans, many commercial lenders will only allow commercial assets to be used as collateral for a commercial loan, and do not accept residential property.
With SBA lenders, residential real estate can be used for collateral to secure the SBA loan. In fact, under SBA guidelines, SBA lenders are required to take any available collateral to secure an SBA loan – another part of the incentive for lenders to offer SBA loans to small business owners. The ability for the SBA to use personal residences as collateral helps make SBA Loans more obtainable for more small business owners. Most home-owners have a bank mortgage in place, but similar to the commercial real estate example above, if there is available equity then the residential real estate can be used as collateral.
Another type of collateral that can be used to secure an SBA loan for a small business is investment property. Business owners that invest in various types of investment properties have the ability to pledge those properties as collateral for an SBA Loan, if their lender will accept them. Whether the investment property is a shopping center, office building, apartment building, or single-family home, it might be eligible to be used as collateral.
One final type of collateral that small business owners can use to secure SBA loans are marketable securities. Marketable securities are liquid assets that can quickly be turned to cash. A few examples of marketable securities are publicly traded stocks, private or public bonds, and certificates of deposits (CDs). Like commercial real estate, marketable securities are typically used as ‘boot’ or extra collateral to help a borrower gain additional liquidity. Advance rates for securities tend to range from 50% to 95%, which is dependent on the type of security.