Analyzing Collateral Adequacy the “SBA Way”
By Karen McHugh, SBA Complete
A loan request is not to be declined solely on the basis of inadequate collateral. Many lenders use the SBA loan programs for applicants that demonstrate repayment ability, but lack adequate collateral to fully repay the loan if it defaults. However, SBA does not permit a guaranty to be used as a substitute for available collateral and requires the lender to collateralize the loan to the maximum extent possible up to the loan amount.
To the extent that collateral is available; SBA requires that a loan be “fully secured” (at liquidation value). SBA requires that a lender identify all available collateral and to determine the liquidation value of that collateral. The liquidation values may be determined by the lender based on their conventional or SBA lending policies however, they must be consistently applied from loan to loan. Also, SBA liquidation values should not be more lenient than non-SBA liquidation values. Once the liquidation value has been determined, they should be compared to the actual loan amount to assess overall adequacy of the collateral. If the loan is not fully secured, the lender should determine and certify that no additional collateral is available with the conclusion that the collateral shortfall is sufficiently overcome by other strengths in the business.
The collateral analysis should split out values of assets by category, assigning more realistic loan/value % for non-real estate collateral. Business operating and trading assets may be assigned a value of up to 10% of the current book value when determining liquidation value. If the applicant anticipates obtaining other financing secured by working assets and the SBA loan will be in a subordinate lien position on that financing, then these assets should not be included in the calculation to determine “fully secured”.
The lender should require a more complete discussion of the collateral situation for every loan, including the requirement that, in the event of a collateral shortfall, the analyst should verify that no other collateral is available, and document the file with that conclusion and its basis.
Collateral Value should be adequately analyzed with the suggested format:
• Collateral grid included in file (showing market value, liquidation value, prior liens)
• Analysis of whether loan is “fully secured” with all available business and personal assets
• Liquidation value of assets must equal or exceed the loan amount
• Liquidation value used should be justified by lender (compare to loan policy)
List collateral taken as collateral:
Item M/V % Prior Liens Liquidation Value
All collateral should be depicted, even collateral taken with little or no value. Also, be sure to include an asset list of company owned or acquired hard assets e.g., equipment, fixtures, inventory and provide serial numbers for any asset valued at $5,000 or more.
The “fully secured” issue is a credit consideration, not an eligibility consideration. However, if the loan was not fully secured at time of approval, SBA will take that into consideration at time of liquidation. A repair to the SBA guaranty may be made if, at the time of application, additional collateral was available to fully secure the loan, but was not taken.
If loan is not fully secured, determine if:
• Other assets are available that should have been taken (compare to personal financial statements and business financial statements
• Other favorable credit factors exist (and whether or not the lender commented on other credit strengths that offset the collateral weakness)
Also, when loan proceeds will be used to purchase assets, a first security interest in those assets must be obtained. When loan proceeds will be used to refinance existing debt, the loan must be secured with at least the same security as the debt that is being refinanced.
Traversing SBA requirements and how to document your credit analysis according to “the SBA way” can sometimes be intimidating. We want to be your “go to” team for whatever needs you may have in the SBA lending world (consulting and/or outsourcing processes). To learn more about the all-inclusive SBA lending services of SBA Complete, go to www.sbacomplete.com or call us at 800-801-2378.