One of the most helpful aspects of the SBA 7a loan program is its ability to allow banks to make loans that go well beyond established collateral guidelines. This makes it possible to restructure loans for our clients who might not have any other refinancing options.

While this is a great concept, I need to make it clear that when we (or any bank) lend beyond our established LTV guidelines, the SBA requires us to take additional collateral from any business owner having a 20% or greater stake in the company. The most common types of additional collateral (in order of typical availability) are: personal real estate; investment real estate, and marketable securities (that are not in a qualified plan such as a retirement savings account).

Our focus here will be on personal real estate. The SBA considers personal real estate to be ”available collateral” if there is 15% or more equity in the borrower’s home. If a borrower’s home is levered 90%, a second (or third) real estate mortgage on their residence is not required. However, if the borrower has more than 15% equity in their home and we are under-collateralized (per the bank’s credit guidelines), we are obliged to take a second (or third) mortgage on the borrower’s property.

While most business owners insist on keeping their personal assets separate from their business financing arrangements, it is important to remember:

• There is potential cash flow savings realized by refinancing a conventional loan with SBA financing.
• If you are working on a 10-year deal, you will often have the ability to prepay the loan at any time with no prepayment penalty. When the economy gets better and finances improve, you can take the opportunity to refinance with conventional loan terms.
• If the transaction is amortized for 15 years (or more), you only have to stay in the deal for 3 years without having to face the 5%, 3%, 1% prepayment penalty (during years 1 thru 3).
• You have reassurance that as long as the borrower makes their payments on time and abides by our boilerplate loan agreements, we can’t call the loan.
• Finally, as stakeholders in our communities, we — and many other community banks — are doing everything we can to offer as much payment relief (and additional funds) as possible. In this economy, survival is the name of the game, and our bank is doing everything in its power to keep our local economy running.

In any deal, asking for additional collateral is going to be one of our most difficult objections to overcome. What we are offering is a long-term commitment on behalf of the bank without requiring a long-term obligation from the client to stay in the loan.

We face these objections each and every day, and are committed to making SBA refinancing a win-win solution for everyone. Please feel free to contact Kenny or me with any questions, comments, or concerns.

Have a great week!