In this article, you will learn what you need to know about borrower equity and the SBA 7a loan program.

Do you need money for your small business?

Perhaps you haven't been able to receive the funds you need from conventional sources because you do not qualify for conventional commercial loans?

If so, you might want to look into alternative funding options like an SBA 7a loan.

Don’t be misled, however. It is important to keep in mind that SBA lenders will still evaluate your creditworthiness, which include determining whether or not you meet the SBA collateral requirements. 

You will, however, be one step closer to signing a loan agreement in accordance with this program that is facilitated by the Small Business Administration if you prepare yourself.

How SBA Loan Programs Work

The Small Business Administration (SBA) does not make direct loans to business owners; rather, it provides a guarantee to commercial lenders up to a predetermined maximum amount. It is possible that you will be able to obtain the necessary funds if you have this guarantee in place.

However, there are still regulations that must be followed in order to qualify. Let's dive in.

Assessing Eligibility for Small Business Administration Loans

When you apply for a loan from the Small Business Administration (SBA), the lender will evaluate your overall creditworthiness to determine whether or not you are qualified for the loan. Let's take a look at the criteria that the lender evaluates while deciding whether or not to approve an application.

Management Experience

It is not necessary for you (or your business partners, if that is the case) to have an MBA in order to demonstrate to a lender that you have what it takes to run a successful firm. You will, however, be required to demonstrate a combination of management experience as well as a working knowledge of the business for which you are seeking a loan..

Ability to repay your small business approved loan

Do you have the resources necessary to pay back the loan? Your lender will want to know specifics regarding your cash flow situation. Are you able to afford to pay your financial obligations, including your draw, your suppliers, and your personnel, as well as any additional liabilities that may arise from the requested loan?

You can demonstrate to the creditor that you are able to meet the obligations of the loan by presenting records of sales from past months or years, as well as estimates for the future.

Additionally, have all of your tax returns ready, as well as your P&L statements, Balance Sheet, Operating Agreements, and Entity docs.

Equity Requirements for Borrowers from the SBA

According to the SBA for “standard” SBA 7a loans, “lenders are not required to take collateral for loans up to $25,000. For loans in excess of $350,000, the SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business fixed assets do not “fully secure” the loan the lender may include trading assets (using 10% of current book value for the calculation), and must take available equity in the personal real estate (residential and investment) of the principals as collateral.

In short, an “equity injection” is not a 100 percent requirement for SBA 7(a) loans, but may be necessary to obtain one. It all depends on your financial situation and the risk appetite of the SBA lending bank you are working with.

Lenders typically decide if an equity injection is necessary based on the borrower's creditworthiness and the purpose of the loan. An equity injection may be required if the borrower has bad credit or is seeking a high-risk loan. Equity injections can also help lower the interest rate on a loan.

Use of SBA 7a loan proceeds

Funds from an SBA 7(a) loan can be used for working capital, expansion, equipment purchases, or other purposes.

According to the SBA’s website, basic uses for an SBA 7(a) loan include: 

• Long- and short-term working capital 
• Revolving funds based on the value of existing inventory and receivables 
• The purchase of equipment, machinery, furniture, fixtures, supplies, or materials 
• The purchase of real estate, including land and buildings 
• The construction of a new building or renovation of an existing building 
• Establishing a new business or assisting in the acquisition, operation, or expansion of an existing business 
• Refinancing existing business debt, under certain conditions

Source: 7(a) loans (sba.gov)

Remember, there is always help available. If you need any assistance whatsoever with getting the funding you need for your business, please contact an experienced commercial loan advisor.