Securing a business loan often involves collateral, providing lenders with assurance in case of repayment default. One common tool for securing business loans is a Uniform Commercial Code (UCC) lien. The lender will file a UCC-1 blanket lien against your business for all current and future business assets. A UCC lien is a legal document filed with the state government, granting the lender a security interest in specific business assets. Think of it as a claim on those assets.

What is lender lien position?

Lenders generally require to be in first lien position but only one lender can be. If a different lender is needed (or wanted) for your second loan, they will typically refinance your existing loan and roll it into the new loan. This places the new lender in first lien position.

SBA Collateral Requirements

Collateral Not Sole Basis for Denial: SBA loans are not declined solely due to insufficient collateral if you demonstrate repayment ability (e.g., Debt Service Coverage Ratio, DSCR, of 1.15+). This supports businesses with limited assets, like startups or service-based firms.

Fully Secured Definition: A loan is considered fully secured when the lender takes security interests in all available fixed assets (e.g., real estate, machinery, equipment) with a combined adjusted net book value up to the loan amount, using specific valuation caps.

Collateral Requirements for SBA 7(a) Loans > $350,000

Loans >$350,000:

Personal Real Estate Collateral: If business assets are insufficient to fully secure the loan (collateral shortfall), lenders must take liens on personal real estate (residential or investment) owned by owners with 20%+ direct/indirect ownership with 25% or more equity (appraised value minus outstanding liens). Liens are limited to 150% of the shortfall, and the requirement is mandatory for properties meeting the 25% equity threshold.
- Equity Calculation: Equity = Appraised value – Outstanding liens. For example, a $500,000 home with a $350,000 mortgage has $150,000 equity (30% of appraised value), triggering a lien.
Appraisal Requirement: For commercial real estate collateral, an independent appraisal by a state-licensed or certified appraiser (certified for properties over $1,000,000) is required, compliant with Uniform Standards of Professional Appraisal Practice (USPAP) and dated within 12 months of the loan application. Non-commercial real estate (e.g., residences) has no specific appraisal requirement unless deemed necessary by the lender.
Less Than 25% Equity: Real estate with less than 25% equity is not required as collateral, but lenders may choose to take it at their discretion, documenting the equity source in the loan file.
Example: A $400,000 7(a) loan for a franchise acquisition uses business assets ($250,000 adjusted value) and a second lien on the owner’s home with 30% equity ($150,000) to address the shortfall. A rental property with $50,000 equity (10%) is not required unless the lender opts to include it.

When an SBA Debt Refinance

When loan proceeds from a an SBA 7(a) loan will be used to refinance existing debt, the loan must 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 to be over collateralized based upon SBA collateral requirements and the SBA loan will remain fully secured, the Lender may approve the release of excess collateral. Substitute collateral may be offered providing it is of comparable value and useful life and is determined to be acceptable by SBA the SBA lender. (See Debt Refinance page for more information)

Mitigating Collateral

HELOCs

A HELOC can reduce your home’s available equity, potentially avoiding an SBA lien, but it’s not a guaranteed exemption.

25% Equity Rule: For SBA 7(a) loans >$350,000, personal real estate (e.g., residential or investment properties) owned by individuals with 20%+ direct/indirect ownership, with 25% or more equity (appraised value minus outstanding liens), must be used as collateral if business assets don’t fully secure the loan. A HELOC deducts from this equity, as it’s a lien against the property.
How It Works: A HELOC places a second lien behind the primary mortgage. The SBA lender takes a third lien if both a mortgage and HELOC exist, or a second lien if only a mortgage is present. Reducing equity below 25% (e.g., from 30% to 15% with a HELOC) means the home is not required as collateral.
Mandatory Lien: If the property has 25%+ equity, lenders are required to take a lien, with the lien amount limited to 150% of the collateral shortfall. Lenders have no discretion to waive this requirement unless equity is below 25%.
Example: Your home is appraised at $500,000 with a $350,000 mortgage ($150,000 equity, 30%). A $75,000 HELOC reduces equity to $75,000 (15%), avoiding an SBA lien for a $400,000 loan. Without the HELOC, a lien is mandatory.

What Happens If I Sell a Collateralized Property?

Selling a home with an SBA lien requires coordination with your lender to release the lien and manage proceeds.

Process: Notify your SBA lender of the sale. The primary mortgage is paid off first, followed by any HELOC. Remaining equity is held in escrow by the lender or applied to the SBA loan balance. You can:

Purchase Replacement Property: Apply escrowed equity to a new home or property, with the SBA lender taking a lien on the replacement to maintain collateral security, subject to lender approval.
Reduce Loan Balance: If not purchasing a replacement, escrowed equity is applied to the SBA loan principal.

Example: You sell a collateralized home for $500,000, paying off a $350,000 mortgage. The $150,000 equity is escrowed. Buying a new $400,000 home, you apply the $150,000, and the SBA takes a lien on the new property. Otherwise, it reduces your $400,000 loan balance.

Mitigating Collateral Requirements:

Real estate transferred by the applicant to a spouse or minor children within six months of the date of the application will not be exempt from consideration as available collateral.

If you take a HELOC before you officially apply for your SBA business loan, and the mortgage plus the HELOC leave you with less than 25% equity in your house or investment properties, then a lien will not be required.

Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, if there are tax implications associated with the lien amount in the particular state where the lien is filed.

Can I Use Securities Instead of My House as Collateral?

In some cases, securities can substitute for real estate collateral, depending on lender requirements.

Securities as Collateral: Marketable securities (e.g., stocks, bonds) or whole life insurance cash value can be used if they have verifiable value and liquidity, per lender standards. They don’t need to cover the full loan amount but must contribute significantly to securing the loan.

Conditions: Lenders prioritize business fixed assets (e.g., equipment, real estate) with valuation caps (e.g., 85% for improved real estate, 50% for used equipment) and personal real estate with 25%+ equity. Securities are considered if these are insufficient or if you negotiate a substitution to avoid a home lien, subject to lender approval. The collateral’s adjusted value must support the loan amount.

Example: For a $400,000 loan, business assets cover $250,000, and your home has $150,000 equity (30%). You offer $150,000 in marketable securities instead, which the lender accepts, avoiding a home lien.

Lien Impacts on Future HELOCs or Refinancing

An SBA lien on your home affects future financing options, but flexibility remains under certain conditions.

Refinancing: You can refinance a collateralized home to lower rates or adjust terms, but cash-out refinances are restricted to protect the SBA’s lien position. The SBA lender must approve refinancing to ensure the new mortgage doesn’t impair their collateral (e.g., no cash-out reducing equity below the secured amount).

HELOCs:

Existing HELOCs: Can remain in place post-loan funding, maintaining access to available credit.
New HELOCs: Not prohibited by SBA rules, but SBA lenders may restrict new HELOCs via loan agreements to preserve collateral value. Check with your lender before pursuing a new HELOC.

Business Loan Liens