SBA loan collateral vs. guarantee

When you take out a small business loan, lenders often want to ensure you can pay back the loan, even if the business fails. Personal guarantees and collateral are two different ways a lender can look for this type of security.

A personal guarantee means the business owner agrees to pay off the loan if the business can’t. Collateral gives the bank a specific asset or part of the business to seize if the business defaults on the loan.  When you get an SBA loan, lenders may want you to offer a personal guarantee or collateral — sometimes both.

SBA loan collateral vs. guarantee

While many different types of business loans require either collateral or a personal guarantee, SBA loans have their own requirements for both. Some SBA loans require both collateral and personal guarantees. Others only require one of these.

Do SBA loans require collateral?

There are several different SBA loan types, and each lender may differ in their specific requirements. If you want to get an SBA loan of $25,000 or less, no collateral is required. But individual lenders may ask for collateral on loans of this size.

For loans above $25,000, collateral requirements vary by loan program. Here’s what you can expect for each type:

• Standard 7(a): Collateral required for loans over $25,000. Loans for over $350,000 require collateral that equals the largest value possible up to the loan amount. This may include trading assets if fixed assets don’t match the entire value of the loan.
• 7(a) Small Loan: Collateral required for loans between $25,000 and $350,000. The collateral requirements will match those of similar loan programs offered by the lender. But the lender must at least place a lien on any assets financed through the loan. They must also place a lien on any business real estate if the equity is at least 25 percent of the fair market value.
• SBA Express: Collateral required for loans between $25,000 and $350,000. Lenders will use the existing collateral policy they have in place for other loan types.
• Export Express: Lenders should follow the collateral policy they have in place for other business loan programs.
• Export Working Capital: Collateral required is the exported inventory which has been financed by the loan.

Do SBA loans require personal guarantees?

SBA loans typically require that all business owners provide a personal guarantee for the loan. A personal guarantee is an agreement that the business owner will personally pay back the loan if the business fails to.

Personal guarantees may be limited or unlimited. A limited personal guarantee has a cap on how much the business owner must pay back on the loan. But an unlimited personal guarantee (sometimes called an unconditional personal guarantee) requires that the business owner pays back the full amount owed if the business cannot.

For SBA loans, the type of personal guarantee required depends on how much of the business an individual owes. Business owners who own 20 percent or more of the company must sign an unconditional guarantee. Business owners who own less than 20 percent of the company may sign a limited guarantee.

What if you can’t provide SBA loan collateral or a personal guarantee?

If you are unable to provide the collateral and/or personal guarantee required for an SBA loan, you may need to consider other options to get the business funds you need. Think about these SBA loan alternatives:

• Business grant: Getting a grant means funding for your business that you don’t need to pay back, so there is no need for collateral or a personal guarantee. While finding grants and applying can take a lot of work, it can definitely be worth it.
• Business credit card: Some business credit cards require a personal guarantee, but there are some that don’t. Business credit cards typically don’t offer spending limits in amounts as high as SBA loans. But they can be a great alternative if you don’t need large amounts of business funds.
• Crowdfunding: Crowdfunding offers a way for businesses to raise money from a large pool of individuals. Crowdfunding often requires that you give investors a gift in return for their money, such as a limited edition product or a small share of the company. But, you don’t need to have a personal guarantee or collateral to raise money for your business this way.
• Business line of credit: A business line of credit can be easier to get than a business loan. Plus, there are both secured and unsecured options available — meaning you don’t need to provide collateral to get one. Be aware that interest rates for unsecured personal lines of credit will be higher than interest rates for SBA loans or other secured loan options.
• Unsecured business loan: Unsecured business loans don’t require any collateral, but they often require a personal guarantee. Talk to lenders to look for an unsecured loan option that will work for your needs.

The bottom line

Getting an SBA loan requires that you provide either a personal guarantee, collateral or both. This means your business assets or personal wealth may be at risk if the business defaults on the loan.

If you don’t want to risk your collateral or personal assets, consider alternatives for funding. You may look into unsecured business loans or other options to find an option that best fits your business needs.

Frequently asked questions

• Is loan collateral the same as a guarantee?

  No, loan collateral and personal guarantees are two different ways lenders secure loan repayment. Collateral is an asset that the lender can seize if the loan is not repaid as agreed. A guarantee is an agreement that the customer signs ensuring that they will personally pay back the loan if the business cannot.

• What is considered collateral for an SBA loan?

  Loan collateral for an SBA loan can be any business asset. This may include things like business equipment, commercial real estate, business inventory or accounts receivable.

• Am I personally liable for an SBA loan?

  You are not always personally liable for an SBA loan, but there are some cases where you may be. If an SBA loan requires the business owner to sign a personal guarantee, they agree to pay back everything that is owed to the lender of the business cannot.