Tag Archive for: SBA Loans

Collateral requirements for SBA loans.

What Are SBA Loan Collateral Requirements?

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Those seeking an SBA loan are likely familiar with the association’s sometimes confusing collateral requirements. Small business owners are required to name some amount of collateral when applying for an SBA loan, but it can be difficult to determine ahead of time how much collateral may be expected to finalize a loan or what necessarily constitutes collateral.

 

While there are several kinds of SBA loans, most common are 7(a) loans. Another kind of SBA loan currently in high demand is EIDL (Economic Injury Disaster Loans).  While 7(a) loans can be requested for any reason, EIDL are specifically disaster loans which have recently gained prominence as a form of pandemic relief. EIDL and 7(a) loans both have different collateral requirements. This article will explore exactly what each of these loan types require from borrowers in the form of collateral as well as other requirements of note. 

What Constitutes Collateral?


Before discussing collateral requirements, it is important to understand exactly what collateral is and what lenders and the SBA generally consider acceptable forms of collateral. Collateral, in its simplest forms, is an asset that a lender accepts as a form of security on a loan in the event of non-payment or a default. 

Examples of Generally Approved SBA Loan Collateral include:

  • Commercial or personal real estate
  • Accounts receivable
  • Standing inventory
  • Business vehicles
  • Equipment, and machinery

SBA 7(a) Loan Collateral and Requirements

SBA 7(a) loans are one of the most frequently sought loans by American small business owners and fall under three categories: Standard (7a), 7(a) Small Loans, and SBA Express. All collateral policies for 7(a) Small Loans and Express Loans are also true for Standard 7(a) loans up to $350,000.

7(a) Collateral Requirements

  • Loans up to $25,000 are unsecured and require no collateral.
  • Loans between $25,000 and $350,000 must follow collateral policies for similarly-sized non-SBA-guaranteed commercial loans.
  • Loans larger than $350,000 require the maximum amount of collateral possible from the borrower to fully secure a loan. The borrower must meaningfully demonstrate they have put forward all available collateral.
  • If a lender believes fixed assets do not fully secure a loan, they may also consider trading assets at 10% current book value.

Notable Variations

Both 7(a) Small Loans and SBA Express loans offer up to $350,000, but the SBA will only guarantee up to 50% of the loan amount for Express Loans. Guarantees for Small Loans are either 85% for loans up to $150,000 and 75% for loans greater than that.

7(a) Loan Additional Information

Applicants for SBA 7(a) loans must agree to an ABA (All Business Assets) lien. This means that all of an applicant’s business assets will be put as collateral for the SBA 7(a) loan. 7(a) applicants may also be subject to a UCC-1 (Universal Commercial Code) lien which gives a lender the legal right to access a business’s assets in the event a business defaults on their loan.

In addition to collateral, every person who owns at least 20% of an applying business must also sign a personal guarantee when seeking SBA 7(a) financing. A personal guarantee is an acknowledgement that the party signing is personally responsible for paying back a loan. Personal guarantees are essentially extensions of collateral. Instead of naming specific assets, however, an applicant agrees to use any assets necessary to pay back the loan.

When applying for an SBA 7(a) loan the lender will have the applicant fill out the “SBA Eligibility Questionnaire for Standard 7(a) Guaranty.” Which allows a lender to individually assess if an applicant has sufficient holdings to secure collateral.

SBA EIDL Loan Collateral Requirements

Unlike 7(a) loans, the SBA EIDL (Economic Injury Disaster Loan) program is exclusively distributed to small businesses that are suffering from a temporary loss of revenue due to a declared disaster. The EIDL program is currently accepting applications from businesses affected by the COVID-19 pandemic. The EIDL program has different collateral requirements than a 7(a) loan, notably because EIDL is a form of aid. Loans made through the EIDL program under $25,000 are still unsecured. Loans over $25,000, however, will require some form of collateral. Because the program often deals with disaster relief, the EIDL program will not turn away an applicant because they do not have a certain collateral value. If an applicant pledges the collateral available to them, a lender will often consider that collateral sufficient.

EIDL program applicants seeking loan amounts greater than $25,000 must also consent to a UCC-1 lien being placed on their business. Businesses applying to the EIDL program requesting more than $200,000 also require a personal guarantee from each person with a 20% or more stake in the business.

Collateral Overview

The SBA intentionally leaves collateral requirements vague in all loan programs. Necessary collateral is determined on an individual level between a lender and an applicant. More important than a dollar amount, however, is a business owner’s ability to demonstrate that they are committed to repaying a loan. Collateral in combination with personal guarantees and UCC-1 liens are mechanisms to assure loan programs are not taken advantage of or used unnecessarily.

Laying out strict financing requirements and cutoffs ignore the nuance of small business and may needlessly dissuade applicants. The most important step for a small business seeking a loan is discussion with a trusted financing expert. If your small business is interested in learning more about SBA loans and funding opportunities, get in touch with a Kapitus financing expert who can assess your options based on your unique situation.

George Washington on a dollar bill, mouth covered with default? sign

How SBA Loan Forgiveness Works

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Not every small business owner is going to succeed on their first try, as roughly 20% of small businesses, on average, fail in their first year of operation according to the Bureau of Labor Statistics. This past year has seen even worse with approximately 140,000 small businesses failing due to  the COVID-19 pandemic. 

It is important to learn from your business failure and move on. After all, as author Sinclair Lewis once wrote, “Failures are finger posts on the road to achievement.” So, if your small business failed to take off the way you hoped and you have an outstanding SBA loan, there is some good news: there are steps you can take to have at least some–if not all–of the loan forgiven. 

No matter what type of SBA loan you took on for your business, be it a 7(a) loan or an SBA Micro Loan, if you have defaulted on a payment, you should talk to an attorney who specializes in dealing with the SBA, and consider applying for the SBA loan forgiveness program.

But, before you begin the process, there are several factors to consider when dealing with a delinquent, non-PPP SBA loan:

#1 Renegotiating With Your Lender

If you miss an SBA loan payment but are still holding out hope for your business, you’re going to get charged a late fee, so it is important that you keep a record of your payments as some lenders might not even alert you when you’ve missed a payment. Lenders generally don’t like to lose customers or money, so they most likely will seek to collect from you before they contact the SBA.

Some lenders may attempt to renegotiate the terms of the loan by offering a new loan repayment plan. If your business has been struggling due to the pandemic but is ready to get back on its feet soon, this may be a viable option for you as some lenders may offer interest-only payments until a new loan restructuring is complete. 

#2 How Does it Work?

If your business is no longer viable and/or you cannot renegotiate with the direct lender and apply for loan forgiveness, the first thing you need to understand is that applying for it will not guarantee that the entire loan amount will be forgiven by the SBA.

Once you apply, the SBA will evaluate your case and step in only after the direct lender has made every effort to collect on the defaulted loan. Afterwards, the SBA may purchase back 50% to 85% of the loan, and then turn directly to you, the borrower, to pay back the remaining balance. If you cannot pay back the remaining assets in full, you can submit to the SBA an “offer in compromise,” wherein you agree to pay back some or none of the loan, depending on your circumstances. 

This is the area in which you need to consult with a finance specialist or attorney who specializes in SBA loans, because the attorney can argue on your behalf that your loan should be fully forgiven. If you cannot pay back the remaining portion of the loan that the SBA states that you owe, it may actually seize your assets, which obviously is not a pleasant option. 

#3 Drawbacks of SBA Loan Forgiveness

Applying for SBA loan forgiveness requires some unpleasant steps. 

  • First, you must dissolve your business entirely and liquidate all business property. This means selling everything related to your business, including equipment, computers, office furniture, etc. 
  • Second, be aware that asking for SBA loan forgiveness will make it difficult for you to obtain an SBA loan when you move on to your next venture.
  • Third, asking for SBA loan forgiveness will negatively impact your business credit score and, potentially, your personal credit score if you were the guarantor of your business. This will make it more difficult to raise financing from both traditional and alternative business lenders in the future.

#4 Would it be Better to File for Bankruptcy?

Every business situation is unique, but if there is truly no hope for your small business, chapter 7 bankruptcy may be an option to explore. This type of bankruptcy would allow you to keep your assets and stop collection on any outstanding debt from business credit cards and loans. 

It is also very complex and costly, however. Chapter 7 would require court filings, as well as follow any legal procedures required under the Small Business Reorganization Act of 2019, which was enhanced under the CARES Act passed in March 2020. Legal fees and court appearances will add up and a court may still decide that you have to liquidate some of your assets to pay off a portion of debt still owed to your creditors. 

Again, this is an option you should discuss at length with a bankruptcy attorney or finance specialist. 

Keep Moving Forward

Once your SBA loan has been forgiven or wiped clean, do not be discouraged. The day will come when you can try running your own business once again. Learn from your mistakes and come up with another great idea for a new business! Remember, financing options will still be available to you even if you need loan forgiveness or declared bankruptcy.

understanding the sba microloan

Understanding the SBA Microloan

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The SBA Microloan program can provide small business owners with small-scale, low-interest loans with very good repayment terms to either launch or expand a business. Here is what prospective borrowers need to know.

What Is a Microloan?

The SBA Microloan program offers loans up to $50,000. They help women, low income, veteran and minority entrepreneurs, certain not-for-profit childcare centers and other small businesses startup and expand. The average microloan is approximately $13,000, according to the U.S. Small Business Administration (SBA).

Microloan lending is different from other SBA loan products from traditional financial channels. The SBA microloan program provides funds through nonprofit community-based organizations. These nonprofit organizations act as intermediaries and have knowledge in lending, management and technical assistance. They are also responsible for administering the microloan program for eligible borrowers.

Uses for Microloans

Microloans are applicable for working capital purposes or for purchasing supplies, inventory, furniture, fixtures, machinery and equipment. Ineligible uses include real estate, leasehold improvements and anything not listed as eligible by the SBA.

Microloans are a great option for businesses with smaller capital requirements. If you need additional financial assistance with purchasing real estate or help with refinancing debt, other SBA Loan Programs are available, such as the 7(a) loan or 504 loan.

Microloan Stipulations

According to SBA, microloans have certain stipulations. For instance, any borrower receiving more than $20,000 must pass a credit elsewhere test. The analysis from the credit elsewhere test determines whether the borrower is able to obtain some or all of the requested loan funds from alternative sources without causing undue hardship. No business or single borrower may owe more than $50,000 at any one time. Furthermore, proceeds cannot contribute to real estate purchases or pay for existing debts.

Microloan Qualification Requirements

Each microloan intermediary has their own credit and lending requirements. In general, intermediaries require some type of collateral in addition to the personal guarantee of the business owner.

Eligible microloan businesses must certify before closing their loan from the intermediary that their business is a legal, for-profit business. Not-for-profit child care centers are the exception and are eligible to receive SBA microloans. Qualified businesses are in the intermediary’s set area of operations and meet SBA small business size standards. Another requirement is that neither the business nor the owner are prohibited from receiving funds from any Federal department or agency. Furthermore, no owner of more than 50 percent of the business is more than 60 days delinquent in child support payments, according to SBA.

Prospective microborrowers must also complete SBA Form 1624.

Microloan Repayment Terms, Interest Rates and Fees

Microloan loan repayment terms, interest rates and fees will vary depending on your loan amount, planned use of funds, the intermediary lender’s requirements and your needs.

The maximum repayment term allowed for an SBA microloan is six years or 72 months. Loans are fixed-term, fixed-rate with scheduled payments. Interest rates will depend on the intermediary lender and costs to the intermediary from the U.S. Treasury. The maximum interest rates permitted are based on the intermediary’s cost of funds. Normally, these rates will be between 8 and 13 percent.

Microloans aren’t structured as a line of credit nor have a balloon payment. Microloans are malleable if the loan term does not exceed 72 months, but not exclusively for the purpose of delaying off a charge. They allow refinancing. However, any microloan that is more than 120 days delinquent, or in default, must be charged off, according to SBA.

There are certain microloan fees and charges. You might have to pay out-of-pocket for the direct cost for closing your loan. Examples of these costs include Uniform Commercial Code (UCC) filing fees and credit report costs. You may also have to pay an annual contribution of up to $100. This contribution isn’t a fee and can’t be part of the loan. Late fees on microloans are generally not more than 5 percent of the payment due.

How to Apply for a Microloan

To begin the application process, you will need to find an SBA approved intermediary in your area. Approved intermediaries make all credit decisions on SBA microloans. Prospective applicants can also use the SBA’s Lender Match referral tool to connect them with participating SBA-approved lenders. Document requirements and processing times will vary by lender.

You may need to participate in training or planning requirements before the SBA considers your loan. This business training helps individuals launch or expand their business.

For more information, you can contact your local SBA District Office or get in touch with a financing specialist at Kapitus.

How the SBA May Help You Recover From Natural Disasters

How the SBA May Help You Recover From Natural Disasters

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Hurricanes, wildfires, earthquakes, volcanoes, mudslides — all can be devastating to the health of your small business.

In 2017, 40 percent of small businesses located within a FEMA-designated disaster zone reported natural disaster-related losses, according to the Federal Reserve. Forty-five percent of affected businesses reported asset losses of up to $25,000, while 61 percent reported revenue losses of up to $25,000.

Recovering from a natural disaster can be an uphill climb but the Small Business Administration offers relief in the form of Economic Injury Disaster Loans (EIDL). These loans can help you get your business back on solid ground.

How Economic Injury Disaster Loans Work

The EIDL program provides small businesses with funding to repair and rebuild following a natural disaster. As of 2018, qualifying businesses can borrow up to $2 million, which can be used for:

  • Replacing or repairing damaged equipment or machinery
  • Buying new inventory or replacing other assets, such as computers, that were damaged or destroyed
  • Repairing or rebuilding your physical premises if they were damaged or destroyed
  • Making improvements that could help reduce the risk of natural disaster-related damage in the future, such as installing generators or storm windows and doors

The main goal of the program is to help businesses that have been affected by a natural disaster get back to normal operations as quickly as possible. These loans are low-cost, with a maximum interest rate of four percent per year, with terms that can extend up to 30 years.

Who’s Eligible for a Disaster Loan?

In addition to small businesses, the EIDL program is also open to small agricultural cooperatives, small aquaculture operations and most private nonprofits.

It goes without saying that your business needs to be located in a federally declared disaster area to qualify. But, physical property damage to your business isn’t a requirement for eligibility.

There is one caveat, however. The program only offers these loans to small businesses if the SBA determines they’re unable to get credit elsewhere. If you’re able to get approved for an equipment or term loan, for instance, an EIDL wouldn’t be an option.

Covering the Gap When Insurance Falls Short

The SBA has a second program to help businesses that have physical property damages which aren’t covered by insurance. The Business Physical Disaster Loan program also offers up to $2 million to small businesses that need to repair or replace property, equipment, inventory or fixtures following a natural disaster.

The maximum interest rate is four percent if you’re unable to get credit elsewhere. If you have other borrowing options, the max rate tops out at eight percent. Like the EIDL program, repayment terms can stretch up to 30 years.

It’s possible to qualify for both an EIDL and a physical disaster loan — you’re just limited to borrowing $2 million total through both programs. You can submit an application for each loan program online to get the ball rolling on disaster relief for your business.

How SBA Loans Work

How Do Small Business Administration (SBA) Loans Work?

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Next up in the “How It Works” series let’s take a look at how  SBA loans work

Every business is unique.

What works for one may not work for another. With a range of choices, each with its own unique requirements and mechanisms, how do you identify which type of financing is best for your business and your needs at this time? You should start with the basics with a full understanding of your situation.  You need to be clear about what you want/need versus what your business can take on. Whether you want capital immediately, or sometime later in a lump sum, or phased over time, take stock of your situation and needs first and then consider your financing options.

Let’s take a look at one of the most frequently used business financing options available to small businesses:

How SBA Loans Work – Small Business Loans through SBA

Government-backed Small Business Administration (SBA) extends aid to all small businesses via loans that help them to not just start up a business but to also sustain and grow that business. While the agency itself does not provide financing, it makes affordable loans available through SBA approved lenders like banks. These loans are designed to meet very specific business purposes, so it is important to understand each of these options before applying for an SBA loan. Though cheaper, you may find it difficult to qualify for these loans. Many individuals are disqualified due to  insufficient collateral, low credit scores or falling within an unqualified category.

SBA loan programs are designed to meet major financial requirements of varied small businesses. These include microloans, real estate loans, equipment loans, and basic loans under the 7(a) program. You can use the loans provided through the 7(a) program for a variety of purposes – setting up a new business, acquiring a business, purchasing equipment and machinery, or as an influx in working capital, among others

How SBA Loans Work – Eligibility

The general small business loans from the 7(a) program are the most popular among all SBA loans. Since these loans are guaranteed by federal agencies, lenders can offer businesses very lucrative and flexible terms for these loans. It is no secret that the 7(a) loans through the SBA are by far the best way for any small business to get financing if they are able to qualify.

To be eligible for 7(a) loans a business must be for-profit; operate within the United States; show a business need for the funds, and – most importantly – show proof that you’ve exhausted all other avenues and financial resources before applying. This means, you will need to have used your own personal assets, reached out to family and friends, and be able to show that you applied for and had been declined by a traditional lender. It’s no wonder, then, that most small businesses find these loans out of their reach. In fact, a 2016 Forbes report points out that, “The head of the U.S. Small Business Administration has cited industry estimates that 80 percent of small business loan applications are rejected.”

How SBA Loans Work – What you should know 

  • Lowest cost option for small businesses looking for financing to start up or grow a business.
  • Offered by traditional and alternative lenders and backed by government guarantee.
  • Multiple types of loans and grants depending on business type and need.
  • Businesses applying for a loan must first use other resources including personal assets.
  • Personal guarantee required by business owners or top management of the company.
  • Long application and funding process compared to alternate financing options.

SBA loans may be a good option when:

  • Working capital is needed to expand the business over the next few years.
  • Consolidating loans from multiple lenders.
  • Hiring new employees or opening a new location.
  • Recovering from declared disasters.
  • Your business is impacted by NAFTA.

SBA loans may not be an option when:

  • Working capital is needed immediately for a very short term.
  • Consolidating loans will require the company to take a loss.
  • Business owner cannot provide a personal guarantee.

Besides the general 7(a) loans, the SBA provides 7(a) loans to cover special situations like companies conducting business in underserved communities and companies looking to expand export activities. There are also microloans up to $50,000, and special programs to help businesses recover from declared disasters. To learn more about SBA loans visit their website right here. Many traditional and alternative lenders also help businesses navigate through the process of applying for these loans.

Want to learn more about your options? Here are the pros and cons of the revenue-based financing.

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