Key Insights to Keep in Mind
- For SBA loans below $50,000, lenders generally aren’t obligated to request collateral.
- The amount of collateral required depends on lenders’ standard policies for similar loans.
- Owners holding at least a 20% share must provide a personal guarantee as demanded by the SBA.
When securing a small business loan, lenders want assurances you’ll repay their funds—even if your business hits rough waters. Two main tools lenders lean on for this safety net are collateral and personal guarantees. SBA loans often involve one or both of these safeguards. Let’s dive into the conditions under which the SBA demands them and what you’re likely to face during the loan application journey.
Distinguishing Between Collateral and Personal Guarantees
| Business assets pledged to secure the loan, possibly including equipment, machinery, real estate, vehicles, inventory, or accounts receivable. | Owner(s) commit to paying back the loan from their own assets if the business defaults. |
| Does not make owners personally liable beyond the business assets. | Owners accept personal liability, making their own finances available to cover the loan. |
| Lender may seize the pledged business property if payments lapse. | Lender can claim personal assets or cash from owners up to the amount specified in the guarantee. |
Are SBA Loans Always Backed by Collateral?
For many SBA loans, collateral isn’t a hard-and-fast requirement. The specifics tend to hinge on the loan type:
| 7(a) and Express Loans | Loans under $50,000 usually don’t mandate collateral. Lenders apply their conventional collateral policies from non-SBA loans. Lack of collateral alone can’t be a reason to reject the loan. |
| Export Working Capital Loan | Inventory and accounts receivable related to export goods typically satisfy collateral requirements. |
SBA lending isn’t uniform—the demands can flex based on your credit score and the specific loan product, so it pays to know the fine print before diving in.
Quick Fact Snapshot
Over 90% of SBA loans are guaranteed by the U.S. government, which helps lenders mitigate risk and encourages them to offer favorable terms. The SBA backs loans up to 85% for loans under $150,000 and up to 75% for larger amounts, ensuring many small businesses gain access to capital they might otherwise be denied.
When Do You Have to Provide a Personal Guarantee?
Almost universally, if you own at least 20% of the business, the SBA will require you to sign a personal guarantee. This legal promise holds you personally responsible for repaying the loan if the business falters.
There are two flavors:
- Limited personal guarantee: Caps your liability to a certain amount.
- Unlimited (unconditional) personal guarantee: You’re on the hook for the full loan balance regardless of circumstances.
For SBA loans, those with 20%+ ownership stakes must sign the unconditional kind, while minority owners below that threshold might only need to sign a limited guarantee.
What If You Can’t Swing Collateral or a Personal Guarantee?
Should you find yourself without the ability to offer collateral or back the loan personally, it doesn’t mean the game is over. Alternative funding avenues might be your best bet:
- Small Business Credit Card: Useful for short-term funding needs, often without collateral or personal guarantees.
- Crowdfunding: Raises capital by pooling contributions from multiple individuals, typically in exchange for rewards or perks rather than ownership or guarantees.
- Small Business Line of Credit: Provides flexible access to funds on demand without necessarily requiring collateral.
Although tackling SBA loan applications can be daunting, the potential perks—such as lower interest rates and manageable payments—often make the effort worthwhile.
Understanding Your Risks and Alternatives
Obtaining an SBA loan means you’re handing over either business assets or personal wealth as a safety net—sometimes both. If your business stumbles, those assets could be on the line.
If you’d rather keep your collateral and personal finances clear, exploring unsecured loans or other funding sources could be the smarter path. Tailoring your financing choices to your unique business needs is crucial.
FAQ: Clearing Up Common Questions
Is Collateral the Same Thing as a Personal Guarantee?
Not exactly. Collateral involves pledging tangible business assets that the lender can claim if you default, while a personal guarantee is a signed commitment where you promise to repay the loan with your personal resources if the business falls short.
What Qualifies as Collateral for an SBA Loan?
Collateral can be any business property or asset—think equipment, commercial real estate, inventory, or accounts receivable that anchors the loan.
Am I Personally Responsible for an SBA Loan?
Yes. Business owners with a stake of 20% or more must sign an unconditional personal guarantee, making them personally liable to repay the loan regardless of the business’s ability.