Business Collateral: What Can You Use To Secure a Small-Business Loan?

ByJulija A.
April 18, 2022

Before approving your business loan, the lender will always look to minimize the risk of you defaulting on it. One way they do this is by requiring collateral - something of value that the borrower can offer up in case they can’t repay the loan. 

What Is Collateral in Business?

Business collateral is a type of security that a business can offer to a lender in case they’re unable to repay a business loan. It’s an asset or assets the business owns that the lender can seize and liquidate if the borrower fails to make payments on the loan.

The amount of collateral you’ll need to provide will depend on the amount and type of the loan you’re applying for.

What Qualifies as Collateral for a Business Loan?

Collateral can be anything that can be used to secure a loan: real estate, inventory, business equipment, invoices, cash, and investments.

What types of collateral you should consider to secure your loan depends on your specific situation. For example, using the business property will likely result in a larger loan amount and lower interest rates. Businesses that struggle with cash flow will do well to use their outstanding invoices as collateral to apply for small business loans with collateral.

Real estate is often a popular choice for collateral, as it is one of the most secure and stable assets that a business can offer. Properties such as homes, apartments, and commercial buildings can all be used as collateral.

Another option is to use inventory or equipment as collateral. This can be a good choice for businesses that have a lot of physical assets but may not have the same equity in their property. Consider the value of the asset and how easy it would be to sell if you needed to. For example, a piece of equipment may be worth more than the outstanding balance on your loan, but it could be difficult to sell quickly if you defaulted on the loan. 

Some business lenders will also allow you to use your personal assets to secure the loan, but it should be agreed upon beforehand.

How Much Collateral Do I Need for a Loan?

On average, small business owners nationwide should expect to put up at least 20%-30% of the loan amount in collateral. However, this number can vary depending on the lender and the type of loan. In extreme circumstances, for example, if your business has poor credit or if you are asking for a loan based on just a personal guarantee, the collateral may be as high as 100% of the amount of the loan.

What Types of Loans Require a Collateral?

Loans that require collateral are called secured loans. They can be lines of credit, SBA loans, equipment loans, and real estate loans. In some cases, even unsecured loans may require collateral if the borrower has a poor credit history and a low personal credit score.

Here are some common collateral for business loan rules:

  • For SBA loans, banks will typically require collateral such as business assets, a personal guarantee, or a blanket lien.
  • Equipment and inventory loans will likely use the inventory and equipment being financed as collateral.
  • Invoice financing will likely take accounts receivable as collateral.

Secured Business Loan Benefits and Disadvantages

There are sizable benefits to using business assets as collateral for a loan. One of the biggest is that it can help you get a lower interest rate. Traditional lenders see collateral as a way to reduce their risk, and they are often willing to offer better terms for collateral business loans than for unsecured loans.

Another benefit of secured loans is that they can give you access to larger loan amounts. Again, this is because collateral acts as a way for the lender to recoup their losses if you default on the loan.

One thing to keep in mind, however, is that if you are unable to repay the loan, your collateral may be seized or liquidated by the lender. So it’s important to plan ahead and be confident in your ability to repay the loan before putting up any assets as collateral.

How To Apply for a Small Business Loan With Collateral

When you’re ready to take out a secured business loan, there are a few things you need to do to prepare. First, you’ll need to find a lender and complete an application. Be sure to include all pertinent financial information, such as your business’s revenue and expenses.

If you are applying for a loan to purchase assets for your company, these will likely be considered collateral by default. Sometimes, the lender will ask for additional collateral, such as a personal guarantee or a blanket lien. From there, the lender will review your information and make a decision on whether or not to approve the business loan with collateral.

Once you’ve completed the application and provided the collateral, you’ll need to sign a lien agreement. This agreement will be the legal claim the lender has over the assets in case your business defaults on the debt.

What Happens If You Default on a Business Loan With Collateral?

If you default on a business loan with collateral, the lender may seize it and sell it to recoup their losses.

If you are uncomfortable with the idea of a lender making a claim on your collateral in case you default, or if you are unsure of whether you’ll be able to meet your payments on time, going with an unsecured loan or alternative financing routes to secure your business funding might be a better idea. However, note that, if you default on an unsecured loan, the lender may take legal action against you to recoup their losses.

Bottom Line

So, in this article, we discussed the ins and outs of collateral in business. In short, a business can offer a variety of assets as collateral to a lender to secure a loan - real estate, equipment, accounts payable, and more.

The benefits of using collateral include lower interest rates and access to larger loan amounts. However, if a borrower can’t repay the loan, the lender may seize or liquidate the collateral.

FAQ

What is business collateral?

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Business collateral is an asset that a business uses to secure a collateral business loan from a lender. Typically, this includes real estate assets, inventory, business equipment, invoices, cash, and investments. The collateral serves as a way for the lender to recoup their losses if the borrower defaults on the loan.

What is an example of collateral?

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An example of collateral is real estate. When a business uses its real estate as collateral for a loan, it serves as a way for the lender to recoup their losses if the borrower defaults on the loan.

Do I need collateral for a small business loan?

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Small businesses don’t always have to put up collateral for small business loans. In fact, the majority of small-businesses loans are unsecured.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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