SBA SOP 50 10 8, B.Ch3.C.3 — Collateral
Verbatim text of SBA SOP 50 10 8 section B.Ch3.C.3 (Collateral), effective 2025-06-01. 5 provision(s) quoted from the SOP PDF. SBA's own document page serves superseded editions, and the SOP is further amended by policy notices — read this with the notices that touch it.
Verbatim regulatory text
Verbatim provisions from SBA SOP 50 10 8, B.Ch3.C.3 — Collateral — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
SOP 50 10 8 B.Ch3.C.3
3. Collateral See Section A, Ch.5, Para. A. for guaranty requirements. General Collateral Requirements i. For loans of $50,000 or less, the Lender is not required to take collateral. (Guaranties still must be obtained in accordance with Section A, Ch. 5, Para. A.)
SOP 50 10 8 B.Ch3.C.3.ii
ii. With respect to collateral, Lenders must use commercially reasonable and prudent practices to identify collateral, which conforms to procedures at least as thorough as those used for their similarly-sized, non-SBA guaranteed commercial loans. Decisions regarding what collateral must be taken to secure a loan are based on the circumstances of the individual loan, including size, and must meet the minimum requirements set forth in this section. iii. When loan proceeds from a Working Capital CAPLine loan will be used to refinance existing debt, the loan should be secured with at least the same collateral and lien priority as the debt that is being refinanced. When the debt being refinanced is considered as being over collateralized based upon SBA collateral requirements and the SBA loan will remain fully secured, the Lender is not required to take excess collateral. Substitute collateral may be offered providing it is of comparable value and useful life and is determined to be acceptable by SBA or the Lender when processing the line under its PLP authority.
SOP 50 10 8 B.Ch3.C.3.ii.iv
iv. Adequacy of Collateral: A loan request is not to be declined solely on the basis of inadequate collateral. In fact, one of the primary reasons Lenders use the SBA-guaranteed program is for those Applicants that demonstrate repayment ability but lack adequate collateral to repay the loan in full in the event of default. However, SBA does not permit its guaranty to be a substitute for available collateral. When real estate serves as collateral, Environmental Indemnification provisions that run with the land are not eligible and need to be removed or waived as to the Federal Government. Working Capital CAPLines i. If the Lender will disburse the line based on a BBC, the Lender must obtain a first lien on the Applicant’s working/trading assets (i.e., accounts receivable, inventory). ii. If the Lender will not use a BBC to disburse the line: a) The Lender must assume full use of the revolving line of credit and secure the line with sufficient collateral to ensure there is a 1:1 collateral ratio. Lender must obtain a first lien position on the working/trading assets (accounts receivable and inventory) financed with the line. If the working/trading assets are insufficient to provide a 1:1 collateral ratio, the Lender also must take additional collateral to ensure there is a 1:1 collateral ratio. b) If business assets do not fully secure the loan, the Lender must take available equity in personal real estate (residential and investment property, including other commercial real estate) of any owners of 20% or more of the Applicant and guarantors, except Supplemental Guarantors, to ensure there is a 1:1 collateral ratio. Liens on personal real estate may be limited to the amount of the collateral shortfall. In addition, liens on personal real estate may be limited to 150% of the equity in the collateral. SBA does not require a Lender to collateralize a loan with real estate (including commercial, residential and investment properties owned by the Applicant or personally by the owners) when the equity in the real estate is less than 25% of the property’s fair market value. See Paragraph D.3.d., Working Capital CAPLines, below for further guidance. Contract CAPLines i. Applicants must be able to provide the Lender with a first lien position on the contract(s) and the proceeds of the contract(s) financed with the line, by assignment to the participating Lender and proper UCC filing. See Paragraph D.3.b.i.b), Exception to the Assignment of Contract Proceeds, in this Chapter below for guidance on exceptions to when an assignment is required. ii. The Lender may take additional collateral in accordance with its policies and procedures governing its similarly-sized, non-SBA guaranteed commercial lines of credit. iii. All liens must be perfected and the lien position verified prior to the initial disbursement of the line. For seasonal, contract or builder lines that revolve for more than one season, contract or construction/renovation project, liens must be perfected prior to the initial disbursement for each season, contract, or project. Builders CAPLines i. SBA will accept no less than a second lien position on the property being constructed or renovated if the purpose of the first lien was to acquire the property. ii. If the property is part of a subdivision where the Lender for the subdivision holds a first lien OR serves as partial collateral for a loan secured by more than one parcel of real estate, the first lienholder must provide a “release clause” for transfer of clear title to any eventual buyer of individual parcels upon receipt of a pre-established payment. iii. Lenders must not take a second lien position if the first lienholder requires that the entire loan be paid in full before any property is released. Where Lender/SBA is in a second position, the total amount necessary to release the first and second liens may not exceed 80% of the fair market value (selling price) of the completed project. Real Estate Appraisal Requirements The regulation governing real estate appraisal is set forth at 13 CFR § 120.160(b). i. Commercial Real Estate: a) For all loans greater than $500,000 secured by commercial real property, all Lenders must obtain an appraisal by a State licensed or certified appraiser. Appraisals must be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). Additionally, SBA requires that completed appraisals be dated within 12 months of the application for guaranty. For federally-regulated Lenders, no exemption is granted under the Interagency Guidance Appraisal and Evaluation Guidelines for Transactions Insured or Guaranteed by a U.S. Government Agency. b) For all loans $500,000 or less secured by commercial real property: i) If the loan finances a transaction involving parties with a close relationship (for example, transactions between existing owners or family members), or if SBA or the Lender otherwise concludes that an appraisal is necessary to appropriately evaluate creditworthiness, the Lender must obtain an appraisal as described in Paragraph i.a) above. ii) If an appraisal is not required under the preceding Paragraph, all Lenders must obtain an appropriate evaluation of the commercial real estate securing the loan that is consistent with safe and sound banking practices. Evaluations are not required to be performed in accordance with USPAP or by State licensed or certified appraisers but should be consistent with the Interagency Guidance Appraisal and Evaluation Guidelines and the Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions, issued by the Federal Banking Regulators. c) The appraiser must be:
SOP 50 10 8 B.Ch3.C.3.ii.i
i) Independent and have no appearance of a conflict of interest (such as a direct or indirect financial or other interest in the property or transaction, independent of the loan production function, and not involved in the approval of the transaction); and ii) Either State-licensed or State-certified, with the following exception: when the commercial property’s estimated value is over $1,000,000, the appraiser must be State-certified. d) In order for the appraiser to identify the scope of work appropriately, the appraisal must identify the Lender as the client and/or an intended user of the appraisal, as those terms are defined in USPAP, except that federally-regulated Lenders may follow their primary regulator’s FIRREA requirements to the extent they permit otherwise. The Lender may not use an appraisal prepared for the seller or the Applicant. The cost may be passed on to the Applicant. e) The appraisal must be an “Appraisal Report” prepared in compliance with USPAP. f) If the loan will be used to finance new construction or the substantial renovation of an existing building, the appraisal must estimate what the market value will be at completion of construction. (“Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application.) After construction is completed, Lender must obtain a statement from the appraiser, general contractor, project architect, or construction management firm that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based. If the Lender cannot obtain such a statement, then the Lender may not close the loan without SBA’s prior written permission. g) If the SBA-guaranteed loan was used to cover the construction period, the Lender must notify the appropriate SBA CLSC of any deviation(s) and work with the SBA CLSC to determine an appropriate course of action, including the securing of additional collateral. The Lender’s notification to SBA must provide a sufficient understanding of the reasons for the differences in values between the estimated and actual values as well as a recommendation as to a remedy to offset the difference in values such as additional equity or additional collateral. If additional collateral is being required, the Lender must identify both the fair market and liquidation values of the additional collateral. If the Lender is unable to obtain a statement that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based, but is able to obtain a new appraisal demonstrating that the market value meets or exceeds the original estimate of value, then no additional action on the part of the Lender is necessary. h) If the loan will be used to acquire an existing building that does not require construction, the appraiser should estimate market value on an as-is basis. If the appraiser estimates the value other than on an as-is basis, the narrative must include an explanation of why the as-is basis was not used. i) When valuing the collateral, the Lender must not include the contributory value of any rental income or the value of any intangible assets contained in the appraisal. j) An appraisal may be submitted as part of the loan application to assist with the underwriting or as part of the loan closing. In no case may the Lender rely on an appraisal that was prepared more than 12 months prior to the date of the application. k) If the Lender is going to require the appraisal at closing, the loan application must include an estimate of the value of the real estate and the estimate must be identified in the Lender’s credit memorandum with the requirement for an appraisal that supports the estimated value at time of closing. l) If at time of closing the appraised value:
SOP 50 10 8 B.Ch3.C.3.ii.i
i) Is 90% or more of the estimated value, the Lender may close the loan but must include a written explanation as to why the appraisal is less than the estimated value in the loan file; or ii) Is less than 90% of estimated value, the Lender may not close the loan without SBA’s prior written permission (see exception below for PLP Lenders). The Lender’s justification to SBA must provide a sufficient understanding of the reasons for the differences in values between the estimated and actual values as well as a recommendation as to a remedy to offset the difference in values such as additional equity or additional collateral. If additional collateral is being required, the Lender must identify both the fair market and liquidation values of the additional collateral. iii) Exception for PLP Lenders: PLP Lenders are permitted to close a loan when the appraisal is less than 90% of the estimated value but the Lender must include a written justification as part of its file that may be reviewed by SBA at time of guaranty purchase or when SBA is reviewing the Lender. The justification must include a thorough analysis by the Lender of the reasons for the appraisal being low and an explanation as to what steps the Lender took to offset the risk to SBA from the low appraisal such as additional equity or additional collateral. ii. Non-commercial real estate or real estate securing a personal guaranty: SBA has no specific appraisal requirements for non-commercial real estate (such as a residence) or real estate (commercial or non-commercial) taken as collateral to secure a personal guaranty.
Operationalizing SBA SOP 50 10 8, B.Ch3.C.3 — Collateral
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