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Tuesday, September 9, 2008

Daily Observations - 25% Collateral Rule

Another very short but very important post tonight regarding SBA Loans.

As you are all aware there are two SBA Loans, one is the SBA 7A the other is the SBA 504 loan for the purchase of real estate as part of the transaction. This rule that I am going to elaborate on only applies to the SBA 7A loan and is not applicable to the SBA 504 loan.

The SBA requires the lender to take a lien against all available collateral as you pretty much know for straight business opportunities where there is no real estate as part of the transaction. But when there is real estate the subject property will usually suffice to meet the collateral requirement of the loan, and no additional collateral is deemed necessary,

However there is a twist and that's what tonight's blog is about. If you have any real estate that has 25% or greater equity the SBA requires, not recommends but requires that the property be pledges as additional collateral.

So if you do not want your real estate pledged in addition to the subject property real estate make sure that the equity position is less than 25% after applying all debt to your property. If on your application the SBA lender cannot see 25% equity after all debt has been subtracted the issue is then moot, and the real estate will remain free of any SBA related liens.

For more on SBA regulations visit loanforbiz.

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