- For loans of $50,000 or less, the SBA does not require collateral at all.
- Lenders cannot decline an SBA loan solely because of insufficient collateral—cash flow is the primary consideration.
- Business assets are pledged first; personal real estate is only considered if there’s a shortfall after business collateral.
- Service businesses and acquisitions with high goodwill regularly get approved despite significant collateral shortfalls.
One of the most common questions about SBA loans: “What collateral do I need?” The answer depends on your loan size, the assets involved, and your lender’s policies. Unlike what many think, SBA loans don’t always require extensive collateral—and lenders can’t decline solely because of insufficient collateral.
This guide covers the SBA’s official collateral requirements per SOP 50 10 8 and how they work in practice.
SBA Collateral Requirements Overview
Key Principle: Cash Flow First
The SBA prioritizes the borrower’s ability to repay from business cash flow—not collateral. Per SBA guidelines, collateral is a secondary source of repayment, not the primary consideration.
This is critical: Lenders cannot decline an SBA loan solely because of insufficient collateral. If cash flow supports the loan, it should be approved regardless of collateral shortfall. This rule is codified in SBA SOP 50 10 8.
What the SBA Requires
Per SBA SOP 50 10 8, collateral requirements are:
- $50,000 or less: SBA does not require collateral (except International Trade loans)
- $50,001 – $500,000: Lenders follow their standard commercial loan policies
- Over $500,000: Lenders must take available collateral, but cannot decline solely on collateral shortfall
Collateral Requirements by Loan Size
Loans of $50,000 or Less
For these smaller loans, the SBA does not require collateral. Lenders may still request collateral per their own policies, but it’s not an SBA requirement.
Loans $50,001 to $350,000 (7(a) Small Loans)
For 7(a) Small Loans, lenders apply their standard commercial lending policies. They should:
- Take a lien on business assets
- Consider available collateral
- Follow their internal guidelines
However, they still cannot decline solely due to collateral shortfall.
Loans Over $350,000 (Standard 7(a))
For larger loans, lenders must:
- Take a lien on business assets being financed
- Consider all available business collateral
- Consider personal real estate if there’s a shortfall
- Document the collateral position in the loan file
| Loan Size | Collateral Requirement | Can Decline for Shortfall? |
|---|---|---|
| $50,000 or less | Not required by SBA | No |
| $50,001 – $350,000 | Per lender policy | No |
| $350,001 – $500,000 | Must take available collateral | No |
| Over $500,000 | Must take available collateral + consider personal RE | No |
Types of Acceptable Collateral
Business Assets
- Real estate: Commercial property owned by the business
- Equipment: Machinery, vehicles, fixtures
- Inventory: Products held for sale
- Accounts receivable: Money owed to the business
- Intellectual property: Patents, trademarks (limited value typically)
Personal Assets
- Personal real estate: Home equity, investment properties
- Investment accounts: Brokerage accounts, CDs
- Life insurance cash value: Whole life policies
Equipment, real estate, or other assets purchased with the SBA loan typically serve as primary collateral for that portion of the loan. This is standard practice and doesn’t require additional assets from you.
How Collateral Is Valued
SBA Valuation Guidelines
The SBA uses “net liquidation value”—what assets would bring in a forced sale, not fair market value. This is significantly less than what you might expect:
| Asset Type | Typical Advance Rate | Example |
|---|---|---|
| Real estate | 80-85% of appraised value | $500K property = $400-425K collateral value |
| Equipment (new) | 75-80% of cost | $100K equipment = $75-80K collateral value |
| Equipment (used) | 50-75% of appraised value | $100K equipment = $50-75K collateral value |
| Inventory | 50-70% of cost | $100K inventory = $50-70K collateral value |
| Accounts receivable | 70-80% of eligible receivables | $100K AR = $70-80K collateral value |
Appraisals
For real estate and major equipment, lenders typically order third-party appraisals. For business acquisitions, a business valuation is ordered. These costs are typically paid by the borrower.
Personal Real Estate Valuation
Personal real estate is valued based on:
- Current market value (may require appraisal)
- Existing liens (mortgages, HELOCs)
- Available equity above liens
When Collateral Falls Short
Collateral Shortfall Is Common
Many SBA loans—especially for business acquisitions—have collateral shortfalls. This is normal and doesn’t necessarily prevent approval.
In our experience, the majority of SBA acquisition loans have some degree of collateral shortfall—particularly for service businesses where the value is primarily in cash flow and customer relationships rather than hard assets.
How Lenders Handle Shortfalls
When collateral doesn’t fully cover the loan amount, lenders follow this process:
- Document the shortfall: Lender notes the gap in the loan file
- Consider all available collateral: Business assets, real estate, equipment
- Take lien on personal real estate: If equity is available
- Rely on personal guarantee: The personal guarantee provides additional security
- Approve based on cash flow: If DSCR is strong, approve despite shortfall
While lenders can’t decline solely on collateral, a severe shortfall combined with other weaknesses (borderline DSCR, limited experience, high-risk industry) can tip the decision toward decline. Strong deals overcome collateral issues; weak deals don’t.
Personal Real Estate as Collateral
When Is Your Home at Risk?
The SBA’s position on personal real estate collateral:
- Must be considered: Lenders must consider personal real estate if business collateral is insufficient
- Cannot force unreasonable liens: Lenders shouldn’t require personal collateral that’s disproportionate to the shortfall
- Available equity matters: Only equity above existing mortgages is relevant
How It Works in Practice
For a $500,000 SBA loan with $300,000 in business collateral:
| Item | Amount |
|---|---|
| Loan amount | $500,000 |
| Business collateral value | $300,000 |
| Collateral shortfall | $200,000 |
| Available home equity | $100,000 |
| Remaining gap after home lien | $100,000 |
| Result | Loan can still be approved with gap |
Declining Personal Real Estate
Some borrowers are uncomfortable pledging their home. While you can express preference, lenders have guidelines they must follow. If personal real estate is available and there’s a shortfall, expect the lender to request it.
If you have minimal home equity or your home is heavily mortgaged, it may not provide meaningful collateral anyway. In that case, lenders will document the limited equity and move forward based on other factors.
Collateral for Business Acquisitions
The Goodwill Challenge
Business acquisitions often have significant “goodwill”—the portion of purchase price exceeding tangible asset value. Goodwill isn’t usable as collateral, creating natural shortfalls.
Example: Acquiring a Service Business
| Component | Amount |
|---|---|
| Purchase price | $1,000,000 |
| Tangible assets (equipment, AR, inventory) | $200,000 |
| Goodwill (customer relationships, brand, cash flow) | $800,000 |
| Collateral shortfall | $800,000 |
This is typical for service businesses, professional practices, and other asset-light acquisitions.
Why Acquisitions Still Get Approved
- Strong DSCR (debt service coverage ratio) supports repayment
- Personal guarantees provide additional security
- SBA guarantee protects the lender (75-85%)
- Cash flow is the primary repayment source—not asset liquidation
- Buyer’s industry experience reduces risk
Collateral is just one factor in SBA lending—and often not the deciding one. The SBA explicitly prohibits lenders from declining loans solely due to collateral shortfall. Strong cash flow, industry experience, and a solid business plan matter more. If you’re worried about collateral, focus on demonstrating that the business can comfortably service the debt from operations.
Frequently Asked Questions
For loans of $50,000 or less, the SBA doesn’t require collateral. For larger loans, lenders consider available collateral but cannot decline solely due to shortfall. Many loans are approved with significant collateral gaps.
If your home is pledged as collateral, it could be at risk in a default. However, state homestead exemptions may provide some protection, and lenders would typically exhaust business assets first. The personal guarantee also creates liability beyond pledged collateral.
Yes, particularly for loans under $50,000 or when business cash flow is strong. The SBA prohibits lenders from declining solely due to lack of collateral. Many service businesses and asset-light companies get approved with minimal collateral.
Service businesses and other asset-light companies regularly get SBA loans. Strong cash flow, personal guarantees, and the SBA guarantee itself provide sufficient security for many lenders. Focus on demonstrating strong DSCR.
Yes. Equipment purchased with SBA loan proceeds serves as collateral for that portion of the loan. The same applies to real estate purchased with loan funds.
Yes, but inventory is typically valued at only 50-70% of cost for collateral purposes due to liquidation challenges. Perishable or specialized inventory may receive even lower valuations.
