It’s true: The U.S. Small Business Administration’s loan guarantees help entrepreneurs across the country secure the financing they need to start and grow their companies.
For its most popular product, the 7(a) loan, the SBA will guarantee 85 percent of a loan worth $150,000 or less. The guarantee may be up to 75 percent for loans larger than $150,000. Last year, the SBA helped support more than $17 billion in 7(a) lending to small companies.
While SBA-backed loans are an amazing resource, a lot of borrowers have a big misconception about them: They don’t realize they still need to provide sufficient collateral.
Bill Ferguson is Bank Midwest’s executive vice president of consumer banking, which includes the lender’s SBA products. He said that some small businesses believe they only need to put up enough collateral to cover the 15 to 25 percent of a loan that isn’t guaranteed by the SBA.
In truth, the collateral should be enough to justify the full value of the loan. (However, if insufficient collateral is the only weak spot in an application, the SBA won’t decline it—if the borrower has put up all other available business assets and personal assets, such as residential property and investment real estate.)
This is important for lenders, Ferguson said, because if borrowers default, lenders are required to recoup their losses by foreclosing on the borrowers’ collateral. Only after lenders have gone through the collection process can they seek payment from the SBA for any loss that wasn’t covered by the foreclosure process.
But SBA guarantees can provide some flexibility when it comes to collateral.
Let’s say a company wants to secure a loan by putting up a valuable, but very specialized piece of equipment. A lender might hesitate because, in the event of default and foreclosure, it could be tough for the lender to sell the equipment and get a good price.
In a situation like that, Ferguson said, an SBA guarantee might reassure a lender enough that it would accept a unique asset as collateral.
Ferguson is a big believer in SBA loan products. With an SBA guarantee, lenders often can offer longer terms. That means borrowers have lower monthly payments, which can boost their cash flow. It also helps that borrowers generally can finance any fees by rolling them into the loan itself.
“The SBA program provides a lot of benefits to businesses, startup or otherwise,” he said.