What are the differences of the most popular Small Business Administration loan programs and how do they affect using a factoring company?
The SBA 504 loans use either real estate or equipment as collateral because they are designed to finance those acquisitions.
The SBA 7a loans are able to finance real estate and equipment plus good will. The banks take blanket liens on business assets, but give little value to A/R as collateral. They have to lien the collateral by law (if they want to maintain the SBA guaranty) up to 100% on a liquidated basis to the extent it is available. A bank can finance a loan with an SBA loan guarantee with no collateral if they want, but most will not these days. That being said, banks definitely take marketable securities, home equity, equipment, inventory, furniture and fixtures as well as real estate as collateral.
Liquidated basis means the metric applied to value to take into consideration the cost to control the asset, auction it at a quick sale, and pay an auctioneer, lawyer, etc. as an example a residence is usually at 80% of appraised value as a bank generally ends up getting 80% if they sell it quickly. In additional furniture and fixtures only get 20% because they sell for pennies on the dollar. Cash and marketable securities get 100%. It varies by bank.
So generally speaking the SBA guarantee program and the lending bank usually do not value the company receivables when analyzing collateral for an SBA backed loan. However, since the bank takes an all assets lien and generally places a covenant term that the borrower can not incur additional debt, the factoring company often can’t get their lien perfected without an intercreditor agreement in place.
This makes the factoring of invoices for a company with a pre-existing SBA backed loan very difficult.