Most Common SBA Loan Guarantees Required
The Small Business Administration (SBA) was officially established in 1953, but its philosophy and mission began to take shape years earlier in a number of predecessor agencies, due to the pressures of the Great Depression and World War II.
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The Small Business Administration (SBA) was officially established in 1953, but its philosophy and mission began to take shape years earlier in a number of predecessor agencies, due to the pressures of the Great Depression and World War II. Nearly 20 million small businesses have received direct or indirect help from one or another of those SBA programs since 1953, as the agency has become the government’s most cost-effective instrument for economic development. Like other lending institutions, SBA would also want to protect the security of its loan advances and thus requires some lenient collateral to be furnished before granting any loans. Here’s what you’ll need to provide if you want an SBA loan.
- Collateral: business as well as personal assets
Collateral can consist of assets that are usable in the business and personal assets that remain outside the business. Borrowers can assume that all assets financed with borrowed funds will collateralize the loan. Depending on how much equity was contributed toward the acquisition of these assets, the lender also is likely to require other business assets as collateral.
- Personal guarantees
For all SBA loans, personal guarantees are required of every 20 percent or greater owner, plus other individuals who hold key management positions. Whether a guarantee will be secured by personal assets is based on the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed. In the event real estate is to be used as collateral, be aware that banks and other regulated lenders are now required by law to obtain third-party valuation on real estate–related transactions of $50,000 or more.
- Certified appraisals for loans of $100,000 or more
Certified appraisals are required for loans of $100,000 or more. The SBA may require professional appraisals of both business and personal assets, plus any necessary survey and/or feasibility study.
- Owner-occupied residences
Owner-occupied residences generally become collateral when the lender requires the residence as collateral, the equity in the residence is substantial, and other credit factors are weak. Such collateral is necessary to assure that the principal(s) remain committed to the success of the venture for which the loan is being made. The applicant operates the business out of the residence or other buildings located on the same parcel of land.
- Resource management
The ability of individuals to manage the resources of their business, sometimes referred to as “character,” is a prime consideration when determining whether a loan will be made. Managerial capacity is an important factor involving education, experience, and motivation. A proven positive ability to manage resources is also a large consideration.
Source: Small Business Administration (www.sba.gov).