When an SBA 7(a) Loan Authorization requires an SBA lender to take a security interest in equipment and fixtures, the Authorization Boilerplate requires the following:
"Lender must obtain a list of all equipment and fixtures that are collateral for the Loan. For items with a unit value of $5,000 or more, the list must include a description and serial number, if applicable." (Emphasis added).
This requirement is often not the focus of significant attention prior to loan closing; after all, many other complicated issues and requirements must be addressed before an SBA loan may proceed to closing, and a list of equipment and fixtures seems relatively easy to obtain. However, failure to obtain a list meeting SBA requirements could result in a repair or even denial of the SBA guaranty, so this requirement deserves considerable attention.
The main purpose of obtaining the required list of equipment and fixtures from the borrower is to establish, at origination, the specific equipment and fixtures in which the lender is to obtain a security interest, as set forth in its Security Agreement and as perfected by the filing of appropriate UCC Financing Statements. As a practical matter, the more detailed this list is, and the more business personal property that is identified on it (beyond just the specifically required equipment and fixtures), the better the position the lender will be in to identify its collateral for the applicable loan and to enforce its security interest.
Failure to specifically identify the collateral may result in a repair or denial of the guaranty, if such failure results in the lender's inability to enforce its security interest in the event of a default. At default, SOP 50 57 requires the lender to prepare a new list of the personal property collateral, including serial numbers for items with a liquidation value of $5,000 or more, and to request guaranty purchase the lender must provide the SBA with a reconciliation of its pre-closing and post-default lists. SOP 50 57 provides that
"[a] full or partial Denial of Liability is justified if the collateral required by the Loan Authorization was present at default, but due to the Lender's failure to prepare an adequate list of the collateral when the loan was made, the Lender was unable to enforce its security interest against the Borrower, a trustee in bankruptcy, or a competing creditor, and that failure caused, or could cause, a Material Loss on the loan." (SOP 50 57, Page 157) (Emphasis added).
Thus, having a complete and accurate list at closing provides a baseline for establishing the collateral that the lender should expect to be present at the time of default, and allows the lender to show the SBA that it had sufficiently identified its collateral. The list should be specific enough to allow the lender to recover and liquidate the listed collateral. If the lender is unable to recover and liquidate such collateral, a repair to the guaranty is likely, based on the liquidation value of the missing or unidentified collateral. The magnitude of the loss may result in a complete denial of the guaranty.
Because of the potentially severe repercussions of failing to obtain a sufficient list of equipment and fixtures at loan closing, SBA lenders should be sure to obtain a detailed equipment and fixture list to protect their security interests and, ultimately, the SBA guaranty of the applicable loan.
For more information regarding equipment lists, please contact Joe at jernst@starfieldsmith.com or at 267-470-1227.
