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A traditional Small Business Administration loan requires borrowers to pledge some collateral. “To the extent that worthwhile assets are available, adequate collateral is required as security on all SBA loans,” says the administration’s website.

The SBA defines collateral as an asset that is valuable enough to ensure the repayment of the loan if other sources fail. For instance, real estate is one of the most commonly used forms of collateral. If a business defaults on its SBA loan and has committed its property as collateral, the bank could seize the property and sell it in order to recoup the loan losses.

Real estate is not the only acceptable form of collateral, though. The SBA also business equipment and accounts receivable as security. In some cases, depending on the nature of the business, even inventory can be considered.

Of course, collateral can create big problems for businesses with few tangible assets. Technology companies, for example, rarely have property or inventory to offer banks. Their assets are things like intellectual property and software, valuable but not easy to liquidate. The only option for many borrowers in this situation who really want the inexpensive SBA loan is to put up some personal property as collateral. This is most often the business owner’s own home, but it is also possible to use other valuable items depending on the size of the loan.

Why is all of this necessary? The SBA (a branch of the government) guarantees these loans, meaning it promises lenders to repay up to 75 percent of any loan that defaults with taxpayer money. If the government is willing to take such a risk on small business borrowers, it needs to see the same level of commitment from the benefiting business owners. It can be a tough requirement for some firms, but the collateral stipulation does help keep down the interest rates and fees on these coveted small business loans.


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