October 22, 2024
Adam Hoeksema
Why does the SBA often take your home as collateral for an SBA loan? With 12 years of experience as an SBA lender, I'm going to walk you through how the SBA looks at collateral, how they calculate its value, and why they often ask you to put up your home as part of the deal. During my time as the executive director of Bankable, I approved over 1,500 SBA loans across various industries. This helps me gain a solid understanding of what it takes to secure financing. Now, at ProjectionHub, I use this experience to help small businesses create financial projections that align with what lenders and investors are looking for. My goal is to guide you through the details of SBA loans and improve your chances of securing the funding you need.
SBA loans can be a great choice for small business owners who need access to affordable financing. They typically offer lower interest rates and longer repayment terms compared to traditional bank loans, making them ideal for businesses that want to spread out their payments and keep monthly costs manageable. This option is especially beneficial for businesses looking to expand, purchase equipment, or acquire real estate without facing high upfront costs. However, SBA loans often require a lengthy application process, a strong credit history, and sometimes collateral, such as home equity, which might not be ideal for everyone.
Now back to the main point, let’s say you're applying for a $250,000 SBA loan. You’ve got some commercial real estate you’re willing to put up, maybe some equipment, inventory, and even accounts receivable. All of this sounds like solid collateral, right? But it’s not always that simple. While all of those assets do count as collateral, the SBA and your lender don’t just take them at face value. They'll apply a discounted value to each asset, which means they'll only consider a portion of what those items are worth when determining the total collateral value.
For example, your commercial real estate is appraised at $150,000. The lender will likely discount that by 15%, which means they'll count about 85% of the value—so you end up with around $127,500 in collateral value.
Now, for equipment, they’ll probably discount it by 50%, so if you’ve got $80,000 worth of equipment, they’ll count it as $40,000 in collateral.
For inventory, the lender is going to give it a big discount because they don't really want to deal with it. They wouldn’t know how to sell it, and if they had to, they’d probably have to sell it at a huge discount. So, they might only give you around 10% of its value. If you have $60,000 worth of inventory, they might only count it as $6,000 in collateral.
They'll likely discount your accounts receivable by about 25%, so you’ll get roughly 75% of its value as collateral. That means if you have $50,000 in accounts receivable, they’ll consider about $37,500 for the collateral.
Now, the total appraised value of all your collateral is $340,000, and you’re applying for a $250,000 SBA loan. You might think, ‘I’ve got enough collateral, so I shouldn’t need to pledge my home.’ But after the lender applies their discounts, the actual collateral value drops to $211,000.
If the deal is short on collateral, the SBA will require the lender to use any equity you have in your home as additional collateral. Even if you think your business assets should cover the loan, the reality is that lenders often apply discounts to those assets. This means their value might not be as high as you hoped, and you’ll likely have to pledge your home. That’s just the way SBA loans work. It’s not a fit for everyone because putting your home as collateral is a big decision with real risks. But this requirement is part of how the SBA operates as a government-backed loan program, designed to protect taxpayer money.
You see, the SBA’s primary goal is to minimize risk. When they back a loan, they want to ensure that if things don’t go as planned, there’s enough collateral to cover the lender’s losses. Because the SBA doesn’t provide the loan directly—they guarantee a portion of it, essentially sharing the risk with the lender. It’s not that they specifically want your home; rather, they’re focused on ensuring there’s enough collateral in place to make the loan safe. It’s about giving the lender a safety net, which, in turn, helps them feel more comfortable taking a chance on your business.
If you find the requirements of an SBA loan too restrictive or are unwilling to use personal assets as collateral, you might turn to alternative financing options like online lenders, crowdfunding, or business credit cards. While these options may offer faster approval and fewer collateral requirements, providing quick access to capital, they often come with significantly higher interest rates, which can make them a costly choice in the long run.
Are you unsure where to start with your SBA loan application? You can check out this free SBA Loan Application Checklist.
Choosing the right financing depends on a business’s unique situation and its willingness to navigate the requirements of SBA lending. Want to get some guidance on wherever you are in the SBA preparation or application process? Feel free to take advantage of our FREE SBA Review. We can help you, so don’t hesitate to get in touch. If you have more questions or need advice on your specific loan application, reach out to us at support@projectionhub.com. We’d be happy to review your situation. Thank you!
