An In-depth Analysis
Many U.S. startups rely on Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) awards to fund R&D. As businesses grow and move toward commercialization, they require additional funding. Many individuals look to business loans (from SBA and bank lenders) for these funds.
Lenders require collateral, so a common question arises: can equipment or other assets purchased using SBIR or STTR funding be pledged as collateral for business loans, such as those backed by the SBA (or a bank)? The answer is nuanced, rooted in both federal funding rules and lender requirements. Assets purchased with SBIR/STTR funding are subject to specific regulations that generally restrict their use as collateral for business loans.
Non-dilutive Funding with Strings
SBIR and STTR awards are “non-dilutive”, government-funded grants or contracts supporting research and development by small businesses. These programs stimulate technological innovation without requiring the government to take an ownership stake. However, the use of awarded funds is tightly regulated. The SBA SBIR/STTR Policy Directive (effective May 3, 2023, with no newer version as of July 2025) provides program guidance for all awards.
According to the U.S. Small Business Administration (SBA), equipment and other assets acquired with federal funds are considered government property during the period of performance of the grant or contract. This retention of title means that until the project is completed and the government’s interest in the assets is released, these assets cannot typically be used as collateral without explicit permission from the funding agency.
The Bayh-Dole Act (35 U.S.C. § 200-212), which applies to SBIR/STTR funding, governs inventions and related property developed with federal funds. Under this act, title to equipment purchased with SBIR/STTR funds may vest with the small business. Still, the government retains a non-exclusive, royalty-free license to use the property and may impose conditions on its disposition or use. Additionally, federal regulations, such as those in the Code of Federal Regulations (2 CFR § 200.313), stipulate that equipment acquired with federal funds must be used for the project’s purposes and cannot be encumbered (i.e., pledged as collateral) without prior approval from the awarding agency.
Understanding SBIR/STTR Funding and Asset Ownership
- Title to tangible property, equipment, and supplies purchased with federal funds typically vests in the small business grantee/contractor; however, the federal government retains certain rights to those assets during and sometimes after the project’s completion.
- These rights commonly include requirements for federal approval before assets can be sold, transferred, or used for purposes unrelated to the project or beyond the grant period.
- Congress intends for awardees to purchase American-made equipment and products with SBIR/STTR funds, to the extent possible.
- Agencies must allow continued use of transferred or acquired property for Phase III. The continued use period must be at least 2 years as a directed bailment.
SBA Loans and Collateral: What Lenders Require
All SBA loans require some form of collateral, although the requirements are flexible and determined on a case-by-case basis. Typical collateral includes:
- Business-owned equipment
- Real estate
- Inventory
- Accounts receivable
- Personal assets of owners
Lenders and the SBA require that businesses have “skin in the game.” They also require that collateral is free of encumbrances or conflicting legal claims. Lenders must be able to liquidate collateral in the event of default.
Personal guarantees from business owners with significant equity are always required. These guarantees act as an additional form of recourse for lenders.
Can Government-Funded Assets Serve as Collateral?
Generally, assets acquired with federal grant or contract funds are not suitable for use as loan collateral. These limitations exist for several reasons:
Federal Interest
Even when the small business has a nominal title, the federal government retains specific rights. Those rights include the right to approve the asset’s transfer, require its return, or regulate its disposition. This cloud on ownership makes the asset less valuable as collateral from a lender’s perspective.
Encumbrance and Title Issues
SBA guidelines and common lending practice require that collateral be free from conflicting claims or legal entanglements. Federal restrictions on SBIR/STTR assets introduce such conflicts. As a result, lenders may be unable to perfect a security interest. It also means they might not be able to repossess the assets without potentially violating federal rules.
Lack of Transferability
The SBIR/STTR Policy Directive and award agreements often prohibit or tightly control the sale, transfer, or use of funded assets for non-project purposes without written agency permission. This restriction further complicates their use as reliable collateral.
Agency Approval Required
If you wish to use SBIR/STTR-funded assets as collateral, you must seek written permission from the federal agency that provided the funding (e.g., NIH, DOE, NASA). Agencies may have specific policies regarding the encumbrance of assets, and approval is not guaranteed.
Phase of Funding
During Phase I and Phase II, assets are typically subject to strict oversight. In Phase III, where commercialization occurs and no SBIR/STTR funds are directly used, restrictions may be less stringent, but this depends on the agency’s terms and whether the government retains any interest in the assets.
Type of Asset
Equipment purchased with SBIR/STTR funds is often subject to stricter rules than other types of property. Intangible assets, like intellectual property (IP), may also be restricted due to the government’s retained rights under the Bayh-Dole Act.
Lender Considerations
Even if agency approval is obtained, lenders may be hesitant to accept SBIR/STTR-funded assets as collateral due to the government’s interest, which could complicate foreclosure or liquidation in case of default.
If a business were to attempt to pledge these assets as collateral, the lender would likely reject them due to the government’s superior or restrictive interest in them. There is no explicit provision in SBA lending rules or SBIR/STTR directives that permits such assets to be freely pledged, though the directives do not outright prohibit encumbrance if approved.
Alternative Financing Options
SBIR/STTR programs explicitly state that they do not provide loans; instead, they offer non-dilutive grants or contracts for businesses. For loans, you might explore SBA 504 loans or equipment loans, where the equipment itself can serve as collateral, but only if the SBIR/STTR-funded assets are free of federal restrictions. Other options include state-specific programs or alternative funding sources that may not require collateral.
What Should Founders and Lenders Do?
Before considering SBIR/STTR-purchased assets as collateral:
- Review award terms: Examine the Notice of Award, contract, or grant agreement to confirm ownership and transfer restrictions.
- Consult with your program officer: Federal agencies can clarify what rights (if any) the business has in the funded assets after project closeout or disposition.
- Discuss with the lender: Most commercial and SBA lenders have strict collateral eligibility guidelines, and any uncertainty around title or use is likely to result in rejection.
- Legal counsel: Seek advice from attorneys familiar with government funding and secured transactions for definitive guidance.
- Contact the program officer at the funding agency (e.g., NIH, DOE) to inquire about using assets as collateral.
- Consult with a legal or financial advisor familiar with federal grants to navigate agency requirements and lender policies.
If you have a specific agency or asset in mind, more tailored guidance can be provided based on their policies.
Conclusion
Assets acquired using SBIR or STTR federal funds cannot ordinarily be used as collateral for business loans, including those backed by the SBA, without agency approval. The reason is that the federal government retains specific statutory rights and imposes usage and transfer restrictions that conflict with lenders’ collateral requirements. Consequently, businesses should not rely on such assets to support commercial financing. If alternative assets are unavailable, consider discussing other collateral options or personal guarantees with your lender to explore alternative options.
