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Question – I am interested in purchasing an existing, successful business from my current employer. I have talked with my bank and even though I have cash to put into the deal, his concern is the lack of collateral. The current owner is retaining and then renting the business real estate and business equipment is minimal. Since this is essentially an unsecured request, would an SBA Advantage 7a work?
Our Response – SBA’s written policy regarding collateral has two parts:
- When a loan guaranty is approved, the SBA would expect all existing business assets collateral. After exhausting business assets, personal assets may (and probably will be required). This often will include any personal real estate owned.
- Should there not be sufficient collateral after securing business and personal assets, the SBA can still provide the guarantee, provided the business be solid and personal credit be adequate.
Most small businesses are eligible to receive SBA loan guarantees, however common ineligible applicant cases includeThe applicant not qualifying as a small business.- Link to SBA size standards
- The funds are otherwise available on reasonable terms, meaning the bank would make the same loan terms available without an SBA guaranty, or if personal assets could be used without hardship to the owners.
- The loan is to pay off inadequately secured creditors.
- Your business is engaged in speculation, lending, investment, or rental real estate.
- The applicant is a nonprofit enterprise (except employee stock ownership programs)
Given the information provided, the SBA Advantage 7(a) sounds like an appropriate program given the lack of collateral. You may also want to talk to the seller about the possibility of seller financing to offset the lack of collateral as a backup should the SBA not approve guaranteeing the entire loan.