Do I Need Collateral for an SBA Working Capital Loan?
So you’re thinking about getting some cash to grow your small business and wondering if an SBA working capital loan is the way to go. But that leads to the question – will I need to put up collateral to get approved? Let’s break it down.
What is Collateral Anyway?
Collateral basically means an asset that you promise to the lender if you can’t pay back the loan. Your car, house, equipment, or investments could potentially be used as collateral.If you default on the loan, the lender would have the right to seize your collateral, sell it to recoup their losses. Obviously something you want to avoid, but sometimes collateral is required to get funding.
SBA Loan Programs and Collateral
The Small Business Administration (SBA) has several loan programs available, including the basic 7(a) loan program that many small business owners use for working capital.These loans are partially guaranteed by the government, meaning the SBA will pay the lender some of the losses if you default. This guarantee makes lenders more willing to approve loans, even to riskier borrowers who don’t have perfect credit or much collateral.But don’t get too excited – you‘re generally still going to need to put up some collateral for an SBA working capital loan. The good news is the SBA caps the amount that can be taken.
SBA Collateral Requirements
For loans of $25,000 or less, the SBA only allows lenders to take collateral worth up to 100% of the loan amount.For loans between $25,000 and $350,000, the collateral coverage must be equal to the loan amount.And for loans over $350,000, collateral coverage is capped at 150% of the loan amount under SBA requirements.That’s way better than some big bank business loans that expect 200-300% collateral coverage from small business owners!
What if I Don’t Have Any Collateral?
If you don’t have any assets to put up for collateral, don’t sweat it! The SBA Express loan program allows lenders to approve loans entirely based on your business finances and personal credit scores.No collateral needed for loans up to $25,000 in the Express program! For loans $25,000-$500,000, the regular collateral caps apply.
Tips for Getting Approved
While the SBA loosens collateral requirements compared to big bank loans, lenders will still want to see you have skin in the game.Having some collateral to put up – even if not strictly required – can improve your chances of getting approved and lower the interest rate offered.Anything you own that retains value works as collateral – equipment, vehicles, stocks and bonds, real estate etc. Retirement accounts and insurance policies can also be used as collateral but aren’t touched unless you default.If you really don’t have assets to leverage, having an excellent personal credit score over 720 will go a long way towards qualifying for an SBA working capital loan without collateral.And showing strong business revenue and profits will help reassure lenders you can handle the loan payments, even without collateral.
- SBA working capital loans do require collateral from borrowers in many cases
- But collateral coverage is capped at 100-150% of the loan amount
- Loans under $25,000 may not require collateral under the SBA Express program
- Good credit scores and business finances can offset lack of collateral
The bottom line – collateral requirements shouldn’t be a dealbreaker for getting an SBA working capital loan. Talk to some lenders and see what they say! Having options from multiple lenders helps ensure you get the best rates and terms.