SBA collateral, life insurance and site visit requirements
Short answer
SBA lenders must take a lien on all assets you're buying and test whether the loan is "fully secured" using discounted values: used equipment at 50% of book value (80% with an orderly liquidation appraisal), improved real estate at 85% of market value, furniture and fixtures, receivables and inventory at 10%. Most acquisitions come up short because goodwill isn't counted, and then the lender must take available equity in personal real estate owned by 20%+ owners and guarantors, unless the equity is under 25% of its value.
Buyers expect collateral to be about the business's equipment. On most acquisition loans it ends up being about the buyer's house, because SBA's fully secured test heavily discounts business assets and ignores goodwill. Here's how the test works.
The fully secured test
SBA considers a loan fully secured if the lender has taken security interests in all available fixed assets with a combined adjusted net book value up to the loan amount. For acquisitions, the adjustments are:
| Asset | Counted at |
|---|---|
| Used or existing machinery and equipment (not furniture and fixtures) | 50% of net book value, or 80% of an orderly liquidation appraisal, minus prior liens |
| Improved real estate | 85% of market value (appraised under SBA's rules) |
| Unimproved real estate | 50% of market value |
| Furniture and fixtures | 10% of net book or appraised value |
| Accounts receivable and inventory (lien required) | 10% of current book value |
| Goodwill and other intangibles | Not counted |
The lender must also take a lien on transferable licenses bought in the deal, and on vehicles without an existing lien worth over $20,000.
A worked example
Illustration, not a real deal
Say you're buying a commercial printing business with a $1,500,000 SBA loan. The business's assets:
| Asset | Book value | Rule | Collateral value |
|---|---|---|---|
| Presses and equipment | $400,000 | 50% of NBV | $200,000 |
| Furniture and fixtures | $50,000 | 10% | $5,000 |
| Receivables and inventory | $300,000 | 10% | $30,000 |
| Total | $235,000 |
The shortfall is $1,265,000. Your home is worth $700,000 with a $400,000 mortgage, so equity is $300,000, which is more than 25% of its value ($175,000). The lender must take a lien on that equity. If the presses had an orderly liquidation appraisal of $350,000, they'd count at $280,000 (80%), shrinking the shortfall by $80,000, not enough to change the outcome here.
Personal real estate rules
- Applies to real estate solely owned (including through a solely owned entity) by co-borrowers, 20%+ owners and guarantors, except supplemental guarantors. That includes residential and investment property, and other commercial real estate.
- Liens may be limited to the amount of the shortfall and to 150% of the equity.
- Not required if the equity is less than 25% of the property's fair market value; the lender documents the source of that determination.
- Property transferred to a non-owner spouse or minor children within six months of the application is still considered.
- For 7(a) Small and SBA Express acquisitions, the lender doesn't have to take other commercial real estate (not the project property).
Lines of credit and collateral
If a working capital line takes first lien on the acquired receivables and inventory, 20% to 50% of its day-one availability must fund part of the purchase. See lines of credit with SBA acquisition loans.
When the loan isn't fully secured, life insurance may also be required on certain owners. See life insurance requirements.
Life insurance
For Standard 7(a) loans, lenders can follow their own policy for similar non-SBA loans, with one SBA minimum: if the loan isn't fully secured, life insurance is required in the amount of the collateral shortfall for principals of sole proprietorships, single-member LLCs, or businesses otherwise dependent on one owner's active participation. Policies are collaterally assigned to the lender. Term insurance is fine; credit life or whole life shouldn't be required.
Life insurance is one of the last conditions to be satisfied before an acquisition closes, and one of the easiest to leave late. Underwriting a term policy can take weeks, so start early if you'll need one.
When it's required
Appendix 15 also requires the lender's credit memo on every acquisition to say on whom life insurance is required and how much, or to justify why it isn't. Since most acquisition loans aren't fully secured (goodwill doesn't count as collateral), many single-owner deals end up needing a policy.
How much
Illustration, not a real deal
Say your SBA loan is $900,000 and SBA-discounted collateral, including a lien on home equity, comes to $350,000. If you're the single owner running the business, SBA's minimum is a policy for the $550,000 shortfall, assigned to the lender. Your lender's policy may ask for more, for example the full loan amount.
Mechanics
- Collateral assignment naming the 7(a) lender, acknowledged by the insurer's home office.
- Borrower pays the premiums.
- Existing policies can be pledged.
- Credit life or whole life insurance shouldn't be required; term is normal.
- If uninsurable, written documentation from a licensed insurer.
Other insurance in an acquisition
The credit memo must also cover business hazard and liability insurance. Flood insurance applies when collateral is in a special flood hazard area. Budget for all of these in your closing costs. See SBA loan closing costs.
The site visit requirement
SOP 50 10 8.1 requires the lender's file on a change of ownership to include a site visit for the applicant and for the business being acquired, with the date and comments documented. For businesses without a physical customer-facing location, such as e-commerce, the lender may skip the physical visit if it documents why a visit wouldn't materially improve verification, and uses alternatives like virtual meetings or review of business records.
It sounds like a formality. It's often where a lender first notices that the equipment list, the staffing or the foot traffic doesn't match the story.
What to document
- Date, who visited, and which locations (applicant and target).
- Operations observed: staff, equipment condition versus the asset list, inventory levels, signage.
- Lease premises consistent with the lease being assigned.
- Any concerns raised and how they were resolved.
- For e-commerce: why a physical visit wouldn't materially enhance verification, and the alternatives used (virtual walkthrough, platform dashboards, fulfillment records).
Pair the visit notes with the valuation and QoE: if the visit shows a key customer contract is gone or equipment is idle, the earnings and value assumptions need another look. See the full file checklist.
A lender's collateral worksheet
| Asset | Maximum value for "fully secured" |
|---|---|
| Improved real estate | 85% of market value (appraised) |
| Unimproved real estate | 50% of market value |
| Used machinery and equipment | 50% of net book value, or 80% of orderly liquidation value, minus prior liens |
| Furniture and fixtures | 10% of net book value or appraised value |
| Accounts receivable and inventory | No more than 10% of current book value |
| Personal real estate of 20%+ owners | Available equity must be taken unless equity is under 25% of fair market value |
Run the worksheet early. It tells the lender whether personal real estate will be needed, which buyers often don't expect.
SBA doesn't decline a loan only because collateral is short, but the lender must take what's available and document it.
Common questions
Will an SBA lender take a lien on my house?
If the loan isn't fully secured by business assets and you own 20% or more, the lender must take available equity in your personal real estate, including investment property, unless the equity is less than 25% of the property's fair market value. The lien can be limited to the shortfall and to 150% of the equity.
Can a loan be declined for lack of collateral?
SBA doesn't let its guaranty substitute for available collateral, but a loan can still be approved when collateral is short, as long as the lender takes what's available and the cash flow supports the loan.
Do vehicles need a lien?
Only if they don't already have a lien and are worth more than $20,000 when the SBA loan number is assigned.
Does the seller's liquor license count as collateral?
Transferable licenses conveyed in the purchase must be properly secured as collateral by the lender, where the law allows.
Can I use an existing life insurance policy?
Yes. Lenders may accept the pledge of an existing policy, with a collateral assignment acknowledged by the insurer's home office.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.