Collateral shortfall

Definition

The gap between a loan and the hard assets securing it.

Why It Matters

The SBA's rules forbid declining a loan solely for thin collateral, so a shortfall does not sink a good deal, and the loan leans on cash flow and your signature instead of anything it could repossess. The same rules say the guaranty is no substitute for collateral that exists. So the lender must take a lien on homes and investment property owned solely by owners of 20% or more or by guarantors, wherever the equity reaches 25% of the value. That is worth knowing before underwriting starts, not after. A deal bought mostly for goodwill will always look like this: the collateral test is not the one that decides it.

In numbers: A $1M loan backed by $600k of assets has a $400k collateral shortfall; the SBA does not decline for it alone, but it drives the lien on a home.