Jennifer Borra, Esquire

Everything AND the kitchen sink? This question faces all SBA lenders who are attempting to comply with SBA's policy concerning available collateral. Under SOP 50 10 5(E), Chapter 4, Paragraph II.A., SBA acknowledges that "one of the primary reasons lenders use the SBA program is for Small Business Applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan if the loan defaults". However, SBA requires that lenders secure each loan to the "maximum extent possible up to the loan amount", utilizing not only the borrower's business assets, but also the principal's assets, whether owned individually or jointly, as well.  

SBA's policy of requiring lenders to take all available collateral means any assets owned by the business, or any of its principals, or the principals' spouses, regardless of actual equity or recovery value. If the loan is not fully secured, lenders are generally required to a take a lien for the full amount of the loan on secondary collateral even if the shortfall is a small fraction of the loan. The SBA provides two exceptions where the lender can classify secondary collateral as unavailable. The first exception is in the case of a personal residence where the equity in the residence is less than 25% of the property's fair market value. The second exception is whether there is a legal impediment (such as an irrevocable trust or a prenuptial agreement) which would prevent the borrower from using a spouse's individually owned property to secure the loan. Additionally, SBA provides that liens on a personal residence or investment property may be limited to 150% of the equity in the collateral if there will be significant tax liability associated with the lien amount in the locality where the lien is filed.

Lenders should also keep in mind that they are required to perform an environmental investigation on all commercial real estate securing the loan, even if it is secondary collateral. Other personally-held assets such as publicly-traded stocks, bonds, mutual funds, certificates of deposits and investment property not included in a retirement account may be pledged as collateral, if needed. If a lender wishes to exclude any property as secondary collateral that does not fall under one of the exceptions noted above, it should document the file with adequate support showing the collateral does not have any value and contact SBA for waiver of that collateral condition. For instance, if secondary real estate collateral showed evidence of environmental contamination, then the SBA would likely waive that property as secondary collateral.

Lenders should take care in analyzing all available collateral and ensure they are complying with the current requirements to preserve and protect the SBA guaranty.

For more information regarding SBA collateral policies, please contact Jen at (215) 542-7070 or at [email protected].

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