SBA Loans Archives

What is a Non-Recourse Commercial Loan

by Wil Rivera6 minutes / June 2, 2024

An effective means to expedite a business’s growth is tactical commercial financing. A factor that may dissuade businesses from finalizing a loan agreement, however, is fear of default and the subsequent recourse from lenders. There are actually several types of loans where lenders will agree to not seek recourse after borrower default, which are known as non-recourse commercial loans.

What is Non-Recourse Loan Financing?

A non-recourse commercial loan is an agreement between a lender and a borrowing business where the borrower is not personally liable if they default on the loan. In the case a borrower defaults, lenders may not repossess any of the borrower’s property that was not originally put up for collateral. Lenders may seize profits from the business, but the business owner’s personal assets may not be taken.

What is The Difference Between a Recourse Loan Versus Non-Recourse Loan

Traditional recourse loans require borrowers to make a personal guarantee that they default on their business loan, the lender may seize bank accounts and other assets until the original debt is covered. In the case of a non-recourse loan, lenders may only seize agreed upon collateral in the event of borrower default. Even if the collateral does not sufficiently cover the full value of the loan, the lender cannot seize the borrower’s personal assets to recover losses from the original loan.

Benefits 0f a Non-Recourse Commercial Loan

Non-recourse commercial loans come with various benefits for small business owners, including:

Limited personal liability in the event of a default as the loan is typically backed by collateral
Asset protection for businesses outside of assets used to back the non-recourse commercial loan
Relatively low financial risk while still securing financing

Carve-Outs and the “Bad Boy Guaranty”

Most non-recourse financing agreements have exceptions where the lender may collect beyond collateral in the case of borrower default. Exceptions to non-recourse agreements are called “carve outs,” or “Bad Boy Guarantees.” Most carve outs protect lenders in the case a borrower either misrepresented their intentions or committed a crime. Several common carve outs in non-recourse financing agreements allow the lender to seek recourse outside of collateral, including:

Borrower files for bankruptcy
Borrower commits fraud or other criminal activity
Borrower fails to pay property taxes
Borrower fails to maintain required insurance

If a borrower commits any of the acts specified in an agreement’s carveout clause, the non-recourse protections of the original agreement are nullified.

Qualifying for Non-Recourse Financing

Since non-recourse commercial loans are much riskier for lenders, conditions for approval are generally much more strict. Among traditional qualifications of positive balance sheets, a good business credit score and sufficient collateral, applicants must also meet the terms of a non-recourse guarantee. Similar to carve outs, the non-recourse guarantee specifies that the borrower, or the guarantor, must maintain certain obligations to retain non-recourse status.

A non-recourse lender may require that the borrower sign a guarantee of performance, meaning that certain goals remain on schedule, or a guarantee of payment. Guarantees of payment stipulate that any profits made from the project financed by the original loan must be routed back to pay the accrued debt.

Since lenders face significantly more risk when making a non-recourse loan, non-recourse agreements are generally reserved for exceedingly low risk-of-default borrowers taking on long-term projects.

Types of Non-Recourse Commercial Loans

Real Estate

The most common type of non-recourse financing is non-recourse real estate loans. In the case of real estate loans, non-recourse deals commonly stipulate that the borrower must pay back the loans with profits made after selling the real estate – which is a guarantee of payment. If the property is developed, but does not sell or does not make a profit, the real estate itself is often considered sufficient collateral.

SBA

Non-recourse loans secured by the SBA are traditionally used to help small businesses secure financing for fixed assets such as real estate, office facilities and sometimes equipment. To decrease the direct risk for lenders, the SBA assumes a portion of the risk for the loan and guarantees to cover a percentage of a loan’s full amount in the case of borrower default. If a borrower defaults on a SBA-secured non-recourse commercial loan, the government, not the lender, is liable for the guaranteed portion of the loan.

Development

Another common type of non-recourse commercial loan are non-recourse development loans. Development loans are specifically for developing commercial property and often finance a project through its entire process. Development loan agreements usually state that the borrower must begin repayment once they have started earning a profit. If a project is not profitable or does not complete development, then the loan will often be considered defaulted. When a non-recourse development loan defaults, the property which was financed will then be seized as collateral.

Non-Recourse Factoring

Similar to non-recourse loans, non-recourse factoring agreements stipulate that in the event an invoice cannot be paid, the factor is liable for the losses, not the customer. Non-recourse factoring agreements, however, tend to have higher fees and/or more restrictive terms because the risk is much higher for the factor. Factors are more likely to offer non-recourse invoice factoring services to customers who handle a large and constant flow of invoices and whose clients have good credit. Depending on a company’s size and invoice capacity, recourse and non-recourse factoring are both viable options. Lenders also may consider the size and volume of a customer’s invoices before offering non-recourse factoring options.

Non-Recourse Overview and Considerations

Non-recourse financing may be a misleading name for this kind of financing, as almost every type of non-recourse deal still allows lenders to seek recourse of some kind. Non-recourse agreements are almost always reserved for deals where lenders can recoup their losses without additional recourse. However, semantics aside, if you’re able to qualify for non-recourse financing it can be a great way to keep your business on the growth track.

Non-Recourse Commercial Loan FAQs

What are the disadvantages of a non-recourse loan?

Because non-recourse commercial loans can saddle the lender with higher risk, the lender will usually offer lower loan amounts or require higher interest rates for these types of loans. Compare rate and terms of non-recourse and recourse commercial loans before choosing a type of financing.

How hard is it to get a non-recourse commercial loan?

Qualifying for a non-recourse commercial loan could be more difficult than qualifying for other types of small business financing. This could include higher business and personal credit score requirements.

Wil Rivera

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Can I Get Approved for the SBA 7(a) Loan Program

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by Liz Froment7 minutes / December 11, 2021

Can I Get Approved for the 7a Loan Program

Any small business owner who spends time searching for small business loans–both through banks and online–has likely come across the SBA 7(a) loan program. It’s one of the more popular small business lending options out there. With that, many small business owners look to the Small Business Administration (SBA) to help with financing.

One way the SBA helps small business owners is through their Loan Guarantee Program. Here, you’ll learn what you need to know about the SBA 7(a) loan program and the requirements for approval.

What is the SBA loan program?

SBA loans don’t actually go through the government. Instead, the SBA offers guarantees to participating lenders, including traditional banks, credit unions, online lenders and private lenders.

The goal is to make small business loans less risky for these lenders. This means that more business owners can secure funding to help grow their businesses.

Guarantees typically cover anywhere from 50 to 85 percent of the total loan amount, depending on the loan. The SBA has a variety of loan options, including the 7(a) program, the 504 program, microloans and disaster loans.

However, the SBA 7(a) program is the focus here.

What is a 7a loan?

SBA 7(a) loans are some of the most popular options available for small business owners. In the 2019 fiscal year, over $23 billion in loans saw approval. An average loan was for just under $450,000.

The flexibility of the 7(a) loan program makes it popular among small business owners. 7(a) loans are guaranteed up to $5 million. For loans up to $150,000, the SBA guarantees 85 percent. The SBA guarantees 75 percent for loans over $150,000, up to $3.75 million on the $5 million maximum loan amount.

If you default, the SBA will pay out the guaranteed amount. It’s one way the administration removes some of the default risks from lenders. This allows them to offer more attractive repayment terms.

Many small business owners would likely struggle to secure financing from traditional financial institutions without the SBA Loan Guarantee Program.

What are the SBA 7a loan terms and interest rates?

SBA loan terms are set with the long-term goals of small business owners in mind. Repayment terms are often based on your particular financial situation. However, most of these are paid back via monthly installments.

The set terms are as follows:

Real estate: up to 25 years
Equipment: up to 10 years
Working capital and inventory: up to 10 years

Another benefit of an SBA loan is that it sets a maximum with lenders on interest rates. Base rates are tied to Prime Rates, benchmark interest rates and additional spread rates.

The spread rate varies depending on the loan amount and the term. Typically, higher loan amounts with shorter terms have slightly lower spread rates.

The SBA has specific spread rates they use. But, the rates can change as the market rates do over time.

Are there fees involved with the SBA 7(a) loan program?

While you typically won’t find origination, application and processing fees with SBA loans, there still are fees to consider.

These fees can include:

SBA loan guarantee fees (which vary depending on the size of the loan; but they only apply to the guaranteed amount)
Credit authorization fees
Packaging fees and closing costs
Appraisal fees for real estate related loans
Late payment penalties
Prepayment penalties which apply to loans longer than 15 years that are prepaid within the first three years

The guarantee fee is the highest of all associated SBA loan fees. Keep these fees in mind as you figure your total payment amount.

The basics of qualifying for SBA 7(a) loans

The SBA has several eligibility requirements you must meet to qualify for any of their loans, including the 7(a). Since these are popular loans, you should understand the different requirements before you apply.

First, your business must be for-profit and based within the United States or its territories. Also, the SBA has size standards they use to ensure that the definition of small business gets met–since it varies across industries. This standard is generally a combination of employee size and annual average receipts.

Second, the SBA wants you, as the small business owner, to have a stake too. So, they require that you invest your own time and money into your small business. Also, eligibility rules state that you need to have been in business for a sufficient amount of time, typically a few years.

Finally, your business must be eligible for a loan. Some are not including real estate investment firms, rare coin dealers, companies involved in speculative activities, and companies where gambling is the primary activity, among others.

What are the SBA 7(a) loan program requirements?

Your job isn’t over yet, even once your business is eligible for a loan application. You need to meet the loan requirements, too. The SBA requires you to submit information on your “personal background and character”. This includes criminal history (if any), your citizenship status, work history in the form of a resume, past addresses, and other items as well.

You also need to provide a business plan. A solidified business plan goes a long way towards showcasing the strength of your business and your plans for the future. Don’t forget to include detailed information on how you’ll use your loan.

Other documents required are your business financial statements. You need to show your revenue and profitability. The SBA typically approves businesses with at least $100,000 in revenue each year. You should also provide a listing of any debts and your debt schedule, which can help highlight your expected cash flow.

Your personal credit score is important. The SBA and lenders will typically look for a FICO credit score above 650.

Finally, there is some personal risk involved with 7(a) loans too. The SBA requires anyone who owns over 20 percent of the business signs a personal guarantee on the loan.

While each lender is different and requirements vary depending on your situation, keep these requirements in mind as you move through the process.

Types of loans in the 7(a) program

Within the 7(a) loan program, there are different loan options beyond the 7(a) standard loan you can explore.

The 7(a) Small Loan program has all the requirements of the standard 7(a) loan with one significant difference: it offers a maximum loan amount of $350,000.

SBA Express loans are designed with quick turnarounds in mind. They have a maximum loan limit of $350,000. Note that the SBA guarantees 50 percent of the loan amount.

SBA Export Express loans are directed at exporters for lines of credit up to $500,000. The SBA guarantees 90 percent for loans up to $350,000 and 75 percent for amounts beyond that. It’s yet another option with quick turnaround times.

An Export Working Capital loan is for a revolving line of credit up to $5 million with a 90 percent SBA guarantee. This loan often has short terms of up to 12 months.

International Trade loans are set to meet the long-term financing needs of export businesses. The maximum amount is for $5 million, with the SBA guaranteeing 90 percent of the loan.

How can you use a 7(a) loan?

The SBA sets guidelines for both the general loan terms and how funds get used.

These include:

Expansion and or renovation needs
New construction
Purchasing land or buildings
Purchasing equipment, fixtures, or lease-hold improvements
Working capital
Refinancing debt (the SBA cites it must be for “compelling reasons”)
Seasonal lines of credit
Inventory costs
Business startup costs

Understandably so, it’s essential to know this information before you apply. Otherwise, you could lose your funding if you’re using it for unapproved reasons.

The Bottom Line

It’s easy to see why SBA 7(a) loans are so popular with small business owners. They provide funding with flexibility and attractive terms. If you meet the qualifications and requirements for an SBA loan, it just could be what you and your small business need to achieve your long-term goals. To learn more about SBA loans, click here.

Liz Froment

Liz Froment has been freelance writing for five years. She covers topics such as retirement strategies, financial technology, finance, marketing technology, small business, insurance technology, insurance, commercial insurance, and real estate. Liz has written for clients including UBS, CB Insights, AT Kearney, Cake Insurance, Novidea, LoopNet Coldwell Banker, Zembula, and HotelCoupons, among others. Her ghostwritten work has been seen on Social Media Today, Entrepreneur, Search Engine Journal, and Proformative. Before freelancing, she worked in corporate finance focusing on mutual funds and hedge funds for companies such as State Street Corporation, KPMG, and International Investment Group. From there, she worked at Brown University in grants administration. Liz lives in Boston and has a Bachelors of Business Administration with a concentration in management from the University of Massachusetts at Amherst.

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What Are SBA Loan Collateral Requirements?

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by Brandon Wyson5 minutes / July 14, 2021

KEY TAKEAWAYS

There are multiple types of SBA Loans, including 7(a), SBA Express Loans and EIDL Loans. SBA loans, the most popular of which is the 7(a) loan, will typically use assets like real estate and inventory as collateral for security.
SBA loans, the most popular of which is the 7(a) loan, will typically use assets like real estate and inventory as collateral for security.
SBA EIDL loans, designed for disaster relief, may require collateral for loans over $25,000 based on individual circumstances.

Those seeking an SBA loan are likely familiar with the association’s sometimes confusing collateral requirements. Small business owners are required to name some amount of collateral when applying for an SBA loan, but it can be difficult to determine ahead of time how much collateral may be expected to finalize a loan or what necessarily constitutes collateral.

While there are several kinds of SBA loans, most common are 7(a) loans. Another kind of SBA loan currently in high demand is EIDL (Economic Injury Disaster Loans). While 7(a) loans can be requested for any reason, EIDL are specifically disaster loans which have recently gained prominence as a form of pandemic relief. EIDL and 7(a) loans both have different collateral requirements. This article will explore exactly what each of these loan types require from borrowers in the form of collateral as well as other requirements of note.

What Constitutes Collateral?

Before discussing collateral requirements, it is important to understand exactly what collateral is and what lenders and the SBA generally consider acceptable forms of collateral. Collateral, in its simplest forms, is an asset that a lender accepts as a form of security on a loan in the event of non-payment or a default.

Examples of Generally Approved SBA Loan Collateral include:

Commercial or personal real estate
Accounts receivable
Standing inventory
Business vehicles
Equipment, and machinery

SBA 7(a) Loan Collateral and Requirements

SBA 7(a) loans are one of the most frequently sought loans by American small business owners and fall under three categories: Standard (7a), 7(a) Small Loans, and SBA Express. All collateral policies for 7(a) Small Loans and Express Loans are also true for Standard 7(a) loans up to $350,000.

7(a) Collateral Requirements

Loans up to $25,000 are unsecured and require no collateral.
Loans between $25,000 and $350,000 must follow collateral policies for similarly-sized non-SBA-guaranteed commercial loans.
Loans larger than $350,000 require the maximum amount of collateral possible from the borrower to fully secure a loan. The borrower must meaningfully demonstrate they have put forward all available collateral.
If a lender believes fixed assets do not fully secure a loan, they may also consider trading assets at 10% current book value.

Notable Variations

Both 7(a) Small Loans and SBA Express loans offer up to $350,000, but the SBA will only guarantee up to 50% of the loan amount for Express Loans. Guarantees for Small Loans are either 85% for loans up to $150,000 and 75% for loans greater than that.

7(a) Loan Additional Information

Applicants for SBA 7(a) loans must agree to an ABA (All Business Assets) lien. This means that all of an applicant’s business assets will be put as collateral for the SBA 7(a) loan. 7(a) applicants may also be subject to a UCC-1 (Universal Commercial Code) lien which gives a lender the legal right to access a business’s assets in the event a business defaults on their loan.

In addition to collateral, every person who owns at least 20% of an applying business must also sign a personal guarantee when seeking SBA 7(a) financing. A personal guarantee is an acknowledgement that the party signing is personally responsible for paying back a loan. Personal guarantees are essentially extensions of collateral. Instead of naming specific assets, however, an applicant agrees to use any assets necessary to pay back the loan.

When applying for an SBA 7(a) loan the lender will have the applicant fill out the “SBA Eligibility Questionnaire for Standard 7(a) Guaranty.” Which allows a lender to individually assess if an applicant has sufficient holdings to secure collateral.

SBA EIDL Loan Collateral Requirements

Unlike 7(a) loans, the SBA EIDL (Economic Injury Disaster Loan) program is exclusively distributed to small businesses that are suffering from a temporary loss of revenue due to a declared disaster. The EIDL program is currently accepting applications from businesses affected by the COVID-19 pandemic. The EIDL program has different collateral requirements than a 7(a) loan, notably because EIDL is a form of aid. Loans made through the EIDL program under $25,000 are still unsecured. Loans over $25,000, however, will require some form of collateral. Because the program often deals with disaster relief, the EIDL program will not turn away an applicant because they do not have a certain collateral value. If an applicant pledges the collateral available to them, a lender will often consider that collateral sufficient.

EIDL program applicants seeking loan amounts greater than $25,000 must also consent to a UCC-1 lien being placed on their business. Businesses applying to the EIDL program requesting more than $200,000 also require a personal guarantee from each person with a 20% or more stake in the business.

Collateral Overview

The SBA intentionally leaves collateral requirements vague in all loan programs. Necessary collateral is determined on an individual level between a lender and an applicant. More important than a dollar amount, however, is a business owner’s ability to demonstrate that they are committed to repaying a loan. Collateral in combination with personal guarantees and UCC-1 liens are mechanisms to assure loan programs are not taken advantage of or used unnecessarily.

Laying out strict financing requirements and cutoffs ignore the nuance of small business and may needlessly dissuade applicants. The most important step for a small business seeking a loan is discussion with a trusted financing expert. If your small business is interested in learning more about SBA loans and funding opportunities, get in touch with a Kapitus financing expert who can assess your options based on your unique situation.

Brandon Wyson

Content Writer

Brandon Wyson is a professional writer, editor, and translator with more than eight years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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What is a Non-Recourse Commercial Loan

Manage Your Money

by Brandon Wyson5 minutes / July 13, 2021

An effective means to expedite a business’s growth is tactical commercial financing. A factor that may dissuade businesses from finalizing a loan agreement, however, is fear of default and the subsequent recourse from lenders. There are actually several types of loans where lenders will agree to not seek recourse after borrower default, which are known as non-recourse commercial loans.

A non-recourse commercial loan is an agreement between a lender and a borrowing business where the borrower is not personally liable if they default on the loan. In the case a borrower defaults, lenders may not repossess any of the borrower’s property that was not originally put up for collateral. Lenders may seize profits from the business, but the business owner’s personal assets may not be taken.

What is The Difference Between Recourse Commercial Loan Versus Non-Recourse Commercial Loan

Traditional recourse loans require borrowers to make a personal guarantee that they default on their business loan, the lender may seize bank accounts and other assets until the original debt is covered. In the case of a non-recourse loan, lenders may only seize agreed upon collateral in the event of borrower default. Even if the collateral does not sufficiently cover the full value of the loan, the lender cannot seize the borrower’s personal assets to recover losses from the original loan.