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Are SBA Loans Secured or Unsecured?
January 15, 2021
Are SBA Loans Secured or Unsecured

Are SBA Loans Secured or Unsecured?

Most likely, you understand the difference between secured and unsecured small business loans. However, you might not be sure if you’ll qualify for an unsecured loan, especially if you’re pursuing SBA financing.

Every SBA loan in the SBA’s 7(a) program requires collateral to secure the loan above certain loan amount thresholds. That said, it’s possible to obtain an unsecured SBA loan for smaller loan amounts.

For example, on the Standard 7(a) loan, lenders aren’t required to take collateral for loans up to $25,000. However, 7(a) loans greater than $350,000 must be secured with collateral worth as much as possible, up to the loan amount.

Whether your SBA loan is secured or unsecured has significant consequences for your credit score, business finances, and your lender. All else equal, secured financing is less expensive but carries more downside risk for you. The opposite is true for unsecured financing.

The problem is, an SBA loan’s securitization requirements vary based on the type and amount of the loan. To help you solve that problem, this article will walk through which loan options are secured and unsecured. Then, we’ll explain how SBA loans compare to other funding options.

Collateral Requirements for Six Types of SBA Loans 

The 7(a) loan program is the SBA’s primary program for small business financing. Within that program are six types of loans with various terms and conditions. In the following sections, you’ll see each loan and its collateral requirements. It’s crucial to understand each loan program’s collateral rules and repayment terms prior to submitting a loan application.

1. Standard 7(a)

As explained earlier, Standard 7(a) SBA loans don’t require collateral as long as the loan amount is $25,000 or less. Above that amount, any Standard 7(a) loan must be secured with collateral. 

However, if you plan to borrow money in an amount that’s greater than $25,000 but less than $350,000, the amount of collateral required is up to the individual lender. In other words, specific securitization requirements from the SBA only apply to 7(a) loans above $350,000. Otherwise, it’s up to the lender to create their own collateral requirements.

2. 7(a) Small Loan

As with the Standard 7(a) loan, lenders aren’t required to take collateral for 7(a) small loans up to $25,000. Though for 7(a) Small Loans above $25,000, the lender must place a lien on the assets you purchase with the loan proceeds and your fixed assets.

Keep in mind, that’s just the minimum collateral requirement. Beyond that requirement, individual lenders will use the same collateral policy they do for non-SBA loans.

3. SBA Express

An SBA Express loan is similar to 7(a) small loans in their securitization requirements. With SBA Express loans, collateral isn’t required for loans up to $25,000. However, for loan amounts above $25,000 and up to $350,000, lenders must use their existing collateral policies.

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4. Export Express

The Export Express program provides streamlined SBA-backed financing to exporters. This program includes loans and lines of credit. With this program, the SBA sets no specific collateral requirements. Instead, lenders providing Export Express loans use the collateral policies they’ve established for non-SBA loans.

Put simply, Export Express loans may be secured or unsecured. It just depends on your lender’s policy.

5. Export Working Capital

Export Working Capital (EWCP) loans from the SBA must be secured. Specifically, the SBA requires that any export-related inventory and receivables financed with your Export Working Capital loan are held as collateral. On top of that, anyone who owns at least 20 percent of the business must personally guarantee their EWCP loan.

6. International Trade

International Trade SBA loans are secured by a first lien on the property or equipment financed. Alternatively, other assets of your business may be used as collateral. In some cases, if the SBA determines there’s “adequate assurance of loan payment” a second lien may be used.

Finally, depending on the SBA’s determination, you may need to provide additional collateral and/or personal guarantees.

How Do SBA Loans Compare to Other Loans?

Since they’re backed by the Small Business Administration, SBA loans are generally less expensive than traditional loans. If you’re approved for an SBA loan, you’ll 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.

Conclusion: Consider Your Funding Options As a Small Business Owner

In summary, if you want the most affordable option and you have time to jump through hoops, an SBA loan is worth pursuing. However, if you’re like many businesses struggling to survive the pandemic, an SBA loan may not be feasible.

In that case, you may want to pursue alternatives such as equipment financing, merchant cash advances, business credit cards, or microloans. Finally, you should also look into your eligibility for Coronavirus Relief Options.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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