How do SBA lenders value collateral on a 7(a) loan?

SBA caps how much of each asset counts toward fully secured. SOP 50 10 8.1, App. 19, Para. B.1, sets these limits on a Standard 7(a) loan:

• New machinery and equipment: no more than 75% of price, minus prior liens. Furniture and fixtures are excluded from this line.
• Used or existing machinery and equipment: no more than 50% of Net Book Value, or 80% with an Orderly Liquidation Appraisal, minus prior liens.
• Improved real estate: no more than 85% of market value.
• Unimproved real estate: 50% of market value.
• Furniture and fixtures: no more than 10% of Net Book Value or appraised value.
• Trading assets, if taken: no more than 10% of current book value.

Net Book Value means original price minus depreciation and amortizationamortizationPaying a loan down on a schedule, so each payment covers interest and part of the balance. Full definition (App. 3).

An illustration

Suppose a $1,000,000 loan secured by three assets with no prior liens. A building appraised at $600,000 counts for $510,000. New equipment priced at $200,000 counts for $150,000. Furniture with a $50,000 Net Book Value counts for $5,000. The total is $665,000, so the collateralcollateralProperty a lender can take and sell if a loan is not repaid. shortfall is $335,000.

When value is above book

If a lender assigns fixed assets more than Net Book Value, it must get an independent appraisal from a qualified person (App. 19, Para. A.1, Valuation of fixed assets). A fixed asset value inside a business valuation does not satisfy that rule, unless it is part of a going concern appraisal.