Can You Use Personal Assets As Collateral
According to the SBA, collateral can consist of assets that are usable in the business as well as personal assets that remain outside the business.
If an asset has a title of ownership, you can offer it as collateral. A bank will typically accept this because in the event of default, the bank can access the title, sell the property and recoup its losses. As such, personal collateral often takes the form of an owner-occupied home. Vehicles and equipment, including cars, watercraft and motorcycles, also can be used.
Personal savings and other personal financial accounts are other types of collateral that banks usually accept because their offering reduces the risk for lenders. In the case of default, theres nothing to sell the bank simply seizes the bank account funds.
Buying A Business With The Sba : Next Steps
Once youve decided that an SBA 7 loan is for you, youll need to contact a lender to help you get started. The paperwork, terms, and jargon involved in putting together an application package for an SBA loan can be overwhelming. You can get personalized guidance at SBA7a.Loans. Because we live and breathe the SBA 7 loan process, we know how to help you at every stage of the process. We’ll match you with the lender most likely to approve your request, even if we have to look outside the SBA platform.
What Can An Sba Loan Be Used For
There are additional benefits of SBA loans aside from affordability and flexibility with repayment terms. Whereas other types of traditional loans may impose restrictions on how you can use the funding, there is more flexibility with SBA loans .
So what are SBA loans used for? You can put SBA loan funding to work on all business project expenses, including :
- Ownership transitions, including partner, family, long-term employee, outsider, and employee stock ownership plan buyouts
- Working capital needs beyond normal collateral support
- Machinery, equipment, furniture, fixtures, and leasehold improvement investments
- Debt refinancing for improving cash flow
- Commercial real estate purchases
This flexibility is one of the many benefits of an SBA loan.
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What Is An Sba Loan For Franchise
SBA loans are backed by the Small Business Administration, an U.S. government body. The government partially guarantees these loans up to 85% of the total loan amount. Interest rates range from 5.8% to 8.5%. To be clear, SBA does not provide the money for the loan. The money is provided by private entities like banks and other financial institutions which are SBA approved as lenders.
The SBA guarantees the payment regardless of the loaners actions, thus removing the risk that the lenders will lose money on unpaid loans. SBA loans also have lower down payments and longer repayment terms compared to conventional loans. These loan terms make it a godsend for new or small business owners.
The SBA has many loan programs that cater to many financial needs. But the best SBA loan for franchise businesses is the 7 loan program. The 7 loan is primarily used to start a new business or to expand an existing one.
Making Sba Financing Easier For Veterans
As a veteran, youve earned the right to be frank about what you need. You also earned the right to know the truth behind empty SBA promises. As a company that helps veterans get SBA qualified every day, we know what you needand more importantly, dont needto do to get approved as quickly, easily and efficiently as possible. Well also go through crucial steps every veteran should take to avoid the common pitfalls most business owners encounter when applying for SBA loans in order to save yourself time, cash, and frustration.
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When Will I Know If Ill Be Required To Pledge Personal Real Estate
When you apply for an SBA 7 or Community Advantage loan, your lender will draft a transaction structure that includes an estimate of any collateral shortfall. This is the first step in determining the estimated gap to meet the SBAs fully secured definition.
Your lender will then evaluate available collateral and make determinations about any additional properties that may be required to be pledged.
With this information, your lender will also review the soft costs, such as title insurance/searches, recording fees, and any mortgage recording tax that will be required, and will talk with you about what may be needed to close your loan.
What Happens If My Businesss Assets Dont Meet The Sba 7 Definition Of Fully Secured
In many cases, businesses wont have enough collateral for the SBA to consider the loan fully secured. If you find yourself in this situation, you may need to take a lien against your residential and investment real estate. The SBA may also require this for any owners who own 20% or more of your business, or any additional required personal guarantors.
Its important to note that if you have less than 25% equity in the real estate in question, the SBA typically wont require that it be pledged as collateral on the loan.
Additionally, if you can put more funds into the project and reduce the amount borrowed to meet the fully secured definition, then you may not be required to use residential and investment real estate as collateral.
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How Do Sba Loans Compare To Other Loans
Since theyre backed by the Small Business Administration, SBA loans are generally less expensive than traditional loans. If youre approved for an SBA loan, youll get a very competitive rate.
The problem is, SBA loans are more difficult to obtain. This is due to their limited availability, the paperwork involved, and the strict eligibility requirements.
For example, to be eligible for any of the above SBA loans, you must first use alternative financial resources, including personal assets. You must also have reasonable owner equity to invest.
On the other hand, with non-SBA loans, you can obtain financing without these eligibility requirements. Additionally, depending on your financial situation, you may be able to obtain a non-SBA loan in just one to two days.
Other than the SBA Express program, SBA loans take at least five to ten days to be approved. In many cases, it may take even longer because the loan is reviewed by your lender and the SBA.
Consider The Terms Carefully Before Signing
If youve applied for a small-business loan without collateral and have been approved, the final step is understanding the loan terms and conditions. When reviewing the loan agreement, pay attention to the interest rate and annual percentage rate , the payment schedule, and the loan term. You need to know how long it will take you to pay the loan off and what your total cost of borrowing adds up to when the interest and fees are factored in.
Speaking of fees, check to see which fees youre being charged. For instance, that might include a loan origination fee or prepayment penalty. If your cash flow allows you to pay off the loan early, you dont want to pay a penalty to do it.
Finally, consider whether a personal guarantee or UCC lien is required as part of your borrowing agreement. While you may have the best of intentions to repay the loan, its important to understand how these requirements might affect your business if youre unable to hold up your end of the bargain for any reason.
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Sba Community Advantage Loans
In 2011, the SBA launched its Community Advantage Loans program, which is designed to support businesses that operate in underserved communities.
Under the program, up to $250,000 is available to startups and established companies that wish to expand. Funds are relatively flexible and you can use them to cover working capital costs, buy inventory, acquire assets, and more.
Qualified businesses generally have between seven and 10 years to repay the loan, plus interest, which usually hovers somewhere between 7 percent and 9 percent.
S To Make Veteran Sba Approval Easier On Yourself
Despite the many amazing benefits SBA loans can bring to veteran-owned businesses, they also come with quite a few drawbacks that most lenders wont tell you about, until youre already in the middle of a sticky SBA situation. Fortunately, theyre veryeasily avoidable.Heres 5 steps you can take to make veteran SBA approval easier on yourself:
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Prepare Your Business Plan And Financial Documents
If you are getting a franchise, the franchiser should be able to provide you with assistance in preparing the business plan. The business plan should also have a positive business case, which is very important to show the lender that their money will be put into good use. The business plan should be very professional with narrative on how the business will make money. Use financial statements, charts, and spreadsheets. Numbers may be boring to us, but accountants love them. Check SBAs document requirements and start preparing.
What Documentation Will I Need To Provide For The Sba 7 Loan
Generally, youll need to include the following documentation with your application package:
Agreement to purchase the business
Letter of intent to buy the business
Business tax returns for the past three years
Any outstanding business debt
Financial statements, including a balance sheet, profit and loss, and income projection.
The SBA allows applicants to get help filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so youll need to document who this person is as well.
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How To Secure An Unsecured Sba Loan Now
How to secure an unsecured SBA loan? Listen to Principal Broker, Harry Sidhu, as he shares the challenges and the ways that you can secure an unsecured SBA loan.
The Small Business Administration permits unsecured SBA loans in very specific situations. Small business acquisition SBA loans are typically secured loans. Typically, business assets provide the collateral for the loan. The lender may require additional collateral such as the borrowers personal residence or investment real estate. Here, Harry discusses exceptions that allow for unsecured SBA loans
Harry reviews the elements of a securing an SBA loan. He further discusses what lenders want to see as they evaluate whether to allow an unsecured SBA loan.
How Do Sba Loans Work What’s The Process
Before you apply for a loan from the SBA, its worth getting familiar with the loan application process so you know what to expect moving forward.
First things first: The SBA itself doesnt actually lend you the money. What they do is guarantee a business loan from a lender, like a bank. This gives additional assurance and encourages banks to finance businesses they otherwise might not approve for a loan.
To begin the loan application process, you need to establish a dialogue with an SBA-approved lender either directly or through a broker. The right lender will be able to walk you through a number of different loan options and recommend the financial vehicle that makes the most sense for your unique situation. Youll have to submit a pile of documentation and financial informationyour credit score, personal and business financial statements, several years worth of tax returns, resumes, business plans, authorization for credit and background checks, your completed loan application paperwork, and moreto determine your eligibility.
Over the next few weeks, the lender will assess your qualifications across five categories: your ability to repay the loan, your business experience, the equity youve invested in your company, how much debt you have and how likely you are to repay it, and whether or not you need to put up collateral to secure financing.
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Understand Your Business Credit Score
According to the NSBA Small Business Access to Capital Study, 20 percent of small business loans are denied due to weak or nonexistent business credit. While you may keep a close eye on your personal credit score which can also be used to determine whether youre eligible for an SBA loan many business owners arent as familiar with their business credit score.
Business credit scores are impacted by several factors, which include:
- Your payment history
- Length of time in business
- Outstanding debt
If your score is low, you can improve it by taking these steps:
- Paying your vendors and suppliers on time
- Opening credit card accounts and paying your balances off regularly
- Keeping your debt and credit utilization low
Ultimately, its important to keep an eye on your personal and business credit reports. By doing this, you can ensure that there are no mistakes on your reports, and that you meet lenders score requirements prior to applying again.
How Do Banks Approach Sba Loans
This is often one of the first questions prospective borrowers ask. Because SBA loans involve a government agency in addition to a bank or lending institution, the SBA loan application process appears more involved than obtaining a standard loan.
Many banks offer SBA loans. However, their SBA loan offering is usually an insignificant part of a larger catalog of financial products and services. At American Bank of Missouri, we take a highly specialized approach to SBA lending.
We devote more focus to SBA loans, so our expertise and resources can expedite the SBA loan process. We lead in regional SBA lending, successfully approving $25 million in lending through the SBA 7 program in both 2018 and 2019. We were the leader in SBA lending in Eastern Missouri in 2018, and we led both Eastern Missouri and the entire state of Missouri in 2019.
Because we have an entire division dedicated to SBA lending, we can eliminate confusion and streamline the SBA loan application process.
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When A Portfolio Loans Make The Most Sense
If you have at least $85,000 in securities in your portfolio that trade $5 per share or higher, then a portfolio loan may be the right option for you assuming you are looking to fund your business with a secured/collateral backed option. You wont find lower rates on funding that is secured through collateral. If your stock portfolio is the only place you have the money needed to start your business, using a portfolio loan to avoid having to pay capital gains is the cheapest way to access that money.
They are also perfect for someone with less than perfect credit, because the brokerage firm typically is only evaluating the amount of money you can borrow based on the value and mix of your portfolio, although bankruptcies can be a roadblock.
The funds come with no strings attached, meaning there is no requirement for what the funds can be spent on. Unlike an SBA loan, with a portfolio loan you could start a business that is legal in your state, but illegal at the federal level. This would be a risk you would be taking on by doing so, but there arent any restrictions for how you spend the funds from your portfolio loan because the brokerage firm has leverage to ensure they get their principle back.
Veteran Sba Loan Requirements By Lender Type
Before we begin, its important to note that approval requirements vary depending on which type of lender you apply for a veteran SBA loan through. Take a look at the chart for the fast facts, and well discuss the details after.YesSBA approval for veterans really does vary that much depending on the provider you choose. Why? The Small Business Administration the creators of the SBA loandoes not set qualification standards for sba loans for veterans themselves. Instead, they leave it up to banks and other lenders to set their own standards, making for a wide range of approval processes for veterans seeking SBA funding. If searching for the right SBA loans for veterans is starting to seem overwhelming, dont worrywe got you covered.
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How Are Business Assets Used To Secure Sba 7 And Community Advantage Loans
If your business already owns enough equipment, inventory, furnishings, and other assets to meet the SBA 7 collateral requirements, then the SBA considers the loan fully secured. When calculating this, the SBA looks at the adjusted net book value of the assets, including:
- Improved real estate, which can be valued at a maximum of 85% of market value. This can include SBA project real estate, residential real estate, or other investment real estate.
- Unimproved real estate, which can be valued at 50% of the market value. This typically refers to any vacant residential and/or investment real estate thats owned, but could potentially include SBA project real estate that will remain as vacant land.
- New machinery and equipment , valued up to 75% of the price, less any prior liens.
- Used or existing machinery and equipment , up to 50% of net book value , less prior liens.
- Furniture and fixtures up to 10% of the net book value or appraised value.
- Lenders may also include trading assets valued at a maximum of 10% of the current book value.
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