As you probably already know, the SBA doesn’t have money to loan to you. No, the money comes from private lenders such as a bank. Instead of money, the SBA merely guarantees your loan, freeing the bank to give you better terms, or to make the loan in the first place. While this may give you a loan that you wouldn’t get otherwise, therein lays a few potential pitfalls.
If you can’t get a loan from a bank by yourself, but can get one guaranteed by the SBA, the terms of the loan may be much more restrictive. For example, the SBA rules may dictate that the bank obtain a “blanket lien” as collateral. What this means is that not only the equipment you are purchasing with the loan is put up as collateral, but also your accounts receivables, vehicles, inventory, and other assets; even if they have nothing to do with the original equipment the loan was for. This can lead to a situation called over-collateralization.
If everything goes well, this is a great way for you to get that loan that you couldn’t before. However, if everything goes south, then everything is taken away. Of course that is a worst case scenario. Other, less final problems can arise with a blanket lien. For example, if your accounts receivables are part of the blanket lien, then when it comes time for the payroll that you would normally pay with money from receivables, you run into some trouble. You can ask the bank for permission to use the incoming funds, but in some cases the only way around it is to get the money from somewhere else to pay the payroll, or payoff the bank to get some breathing room.
This shouldn’t worry you needlessly; you can protect yourself. The best time to do this is at the beginning. Everything is negotiable, so ask a lot of questions. Find out exactly what the collateral requirements are and make sure not to give up any more collateral than necessary.
