What collateral does an SBA 504 loan require?
Short answer
The Certified Development Company usually takes a second lien on the project property. Additional collateral is sometimes required, and available personal assets must secure the guaranty if business assets fall short. Source: 13 CFR § 120.934; SOP 50 10 8.1, Sec. C, Ch. 1, Para. E.2.a.
The project property is the core collateralProperty a lender can take and sell if a loan is not repaid. . Under 13 CFR § 120.934, the Certified Development Company (CDC) usually takes a second lien on the project property, and sometimes additional collateral is required. The third party lender usually holds the first lien (SOP 50 10 8.1, Sec. C, Ch. 1, Para. E.2.a).
When a second lien is enough
SBA's second lien position is generally considered adequate. SBA may weigh other factors, including these:
- Strong, consistent cash flow sufficient to cover the debt
- Demonstrated, proven management
- More than 2 years in operation
- A project that is a logical extension of current operations
When more may be required
- Leasehold improvements have minimal collateral value, so the CDC must consider requiring additional collateral.
- If business assets do not fully collateralize the loan, available personal assets must be pledged to secure the guaranty.
- Weak spots such as marginal cash flow or limited working capital can justify more collateral or a larger contribution (Sec. C, Ch. 1, Para. E, Additional Borrower's Contribution and/or Collateral).
What the CDC should avoid
The SOP tells CDCs not to encumber assets the borrower needs to sustain operations. It says collateral with minimal liquidation value limits short-term financing while adding little protection for SBA.
Equipment in a 504 project
When one debenture finances real estate and shorter term assets, SBA requires at least a second lien on those assets. An existing 504 lien on them is the exception (Para. E.2.a).
All 504 collateral must be insured as SBA requires (13 CFR § 120.934).
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