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How Much Collateral Do You Need for a Small Business Loan?

By Erin Ryan Reviewed By Mike Lucas
By Erin Ryan
By Erin Ryan Reviewed By Mike Lucas

How much collateral you need for a business loan can vary. Some lenders won’t require any specific collateral, instead opting for a personal guarantee — or blanket or general lien. For others, collateral is a must. 

If your business meets the criteria for a conventional bank loan, chances are you’ll have to secure that financing with some form of collateral, typically equal to or greater than the value of the loan. 

Let’s go through the ins and outs of putting up business collateral so you can get the working capital your company needs to sustain or expand operations.

What Is Business Collateral?

Collateral is an asset that a borrower provides a lender to secure a loan. Assets can be tangible, which can be seen and touched, such as buildings or vehicles, or intangible, such as accounts receivables.

Lenders assume financial risk whenever they hand money over to a business. To mitigate that risk, many creditors require business collateral. Indeed, an impressive credit history, positive cash flows and other attractive attributes aren’t enough to bypass this requirement in many cases. 

To get approved for a business loan with a conventional lender, such as a bank or credit union, you’ll likely need to set aside a sum of cash or other assets.

Related: How to Get Small Business Funding

Does Collateral Mean a Small Business Loan Is Secured or Unsecured?

Small business loans can be secured or unsecured. When a lender requires you to offer specific collateral in order to approve your loan application, that means you’re applying for a secured loan. 

In contrast, an unsecured loan doesn’t require specific collateral to be pledged. Unsecured loans are issued based on a borrower’s creditworthiness and ability to repay the loan. 

Unsecured loans often require a personal guarantee or a lien, either general or blanket. In the lending world, this is a legal right granted by the borrower to the lender in case of default, allowing the lender to seize any of the borrower’s personal or business assets, respectively, to recoup their loss. 

Borrowers considering taking out a loan backed by a blanket lien should be aware that most banks won’t consider this option unless they’re in a first-lien position. In other words, creditors want to be the first lender to file a blanket lien on your assets. Otherwise, they will have the second or third claim on your assets if you default, which means they may end up empty-handed.

Examples of unsecured financing include short-term loans, merchant cash advances and most business lines of credit. 

In contrast, secured loans are often considered less risky to lenders than unsecured ones. As such, secured loans can come with higher approval amounts, more competitive repayment terms and better interest rates. 

Examples of secured loans include mortgages, construction loans and equipment loans.

Secured loans listed as mortgages, construction and equipment loans and unsecured loans as short-term loans, merchant cash advances and lines of credit.

Do You Need Collateral for a Business Loan?

In some cases, you’ll need to offer collateral; for others, you can get a small business loan without collateral, though stipulations will apply. Whether you’re able to get a loan with or without collateral will depend on factors such as the loan type and your credit history.

Conventional Bank Loans

Many conventional business loans offered through banks are secured and require borrowers to pledge collateral. For real estate loans, the real estate being mortgaged typically serves as collateral. With equipment loans, the equipment you’ll be purchasing serves as collateral. Other examples of collateral you could offer to conventional lenders include cash and vehicles. 

Some banks offer unsecured business loans as well, typically for lower funding amounts. For these options, a personal guarantee will likely be required for approval. Indeed, according to business media company Inc., more banks are expecting small business owners to offer a guarantee.

SBA Loans

Loans secured by the Small Business Administration (SBA) often require collateral to minimize the associated risk. However, a borrower applying for an SBA loan won’t be declined due to inadequate collateral alone. Examples of assets that can be provided as SBA loan collateral include equipment, buildings, accounts receivable and inventory. 

Additionally, according to the Small SBA, business owners looking to borrow funds that require collateral should assume that all assets financed with their loan will be used to secure that loan, though additional assets may be needed.  

  • For standard SBA 7(a) loans greater than $350,000, lenders must obtain as much collateral as possible, up to the loan amount.
  • For SBA 7(a) small loans from $25,000 to $350,000, lenders follow the collateral policies they’ve established for non-SBA commercial loans. At the least, the lender must take a lien on all a borrower’s fixed assets, including real estate, as well as take a first lien on assets financed with loan proceeds.
  • SBA 7(a) loans of up to $25,000 don’t require collateral.

SBA loans also require an unlimited personal guarantee from anyone owning 20% or more of the business.

Alternative Lender Loans

Loans and financing offered through alternative online lenders typically aren’t collateralized and don’t require a borrower to pledge specific assets. That said, a personal guarantee or blanket lien is usually required. 

Because the value of specific collateral doesn’t need to be assessed with alternative loan applications, the application process is streamlined and it’s often easier for borrowers to qualify for financing.

Do you need a loan for your small business?

Can You Use Personal Assets as Collateral?

According to the SBA, “collateral can consist of assets that are usable in the business as well as personal assets that remain outside the business.” 

If an asset has a title of ownership, you can offer it as collateral. A bank will typically accept this because in the event of default, the bank can access the title, sell the property and recoup its losses. As such, personal collateral often takes the form of an owner-occupied home. Vehicles and equipment, including cars, watercraft and motorcycles, also can be used. 

Personal savings and other personal financial accounts are other types of collateral that banks usually accept because their offering reduces the risk for lenders. In the case of default, there’s nothing to sell; the bank simply seizes the bank account funds.

Car, house and bill balancing with bricks

How Is the Value of Business Collateral Determined?

For loans that require business collateral, an appraiser will value the assets you’re pledging to secure the loan. It could be one item or several. The appraiser is licensed and is hired by your lender to conduct a certified appraisal. 

The lender then “discounts” the appraised value of the asset based on its policies. One example is real estate serving as collateral, which according to the SBA, can be discounted at 80%

You might be wondering why lenders discount the value of your assets. The value assigned to an asset often is lower than the fair market value of the item because the lender may need to sell the property quickly to recoup funds in the event of default.

Also keep in mind the value of assets can change over time, in which case the value may need to be reassessed down the line, particularly if there are extended loan terms.

Loan-to-Value Ratio and Business Collateral

The loan-to-value (LTV) ratio refers to the total loan amount and how it compares with the value of the collateral you’ve offered to secure the loan. The LTV ratio provides lenders with a convenient, bite-size assessment of the risk of approving a loan. 

The higher the LTV ratio, the riskier the loan is for the lender. Typically, an LTV ratio of 80% or lower is best, although collateral for business loan approvals may be necessary. The lower the LTV ratio, the lower your interest rate will likely be.

Keep in mind, lenders that don’t require collateral do not consider the LTV ratio. They look at other factors to make their lending decision, such as cash flow, credit profile and business health.

Business Collateral Examples

There are several types of business collateral for loans that range across several asset classes. 

In terms of what can be used as collateral for a business loan, consider items that can be liquidated fast, because banks and lenders need collateral that can be quickly converted into cash. That’s why cash itself is often preferred over most other forms of collateral.

Although some business loans have been secured with rather eccentric assets, including wheels of cheese, most banks rely on one of the following types of collateral for small business loans.

Images of various forms of collateral, including cars, inventory, real estate, invoices, machinery and investments.

Cash

When it comes to taking out a business loan with collateral requirements, cash is king. Although it may seem like a paradox to secure a cash loan with cash, a cash-secured loan is common. This is because cash-secured loans give lenders the ability to instantly recoup their losses in case you default.

Typically, a cash savings account held by the owner of the business (at the same bank) will be used to secure the loan. As a result, the creditor can quickly liquidate the cash in the applicant’s savings account immediately after they default on the loan. 

While cash-secured loans present a very low-risk solution for lenders, allowing a lender the ability to claim your savings can present a high-risk opportunity for you. If you’re forced to default because of outside circumstances, then your personal financial security can be jeopardized.

Property

Although property and physical real estate can be more difficult to convert to cash, they are another form of business collateral widely accepted by creditors and lenders. Buildings, equipment, inventory, vehicles and homes can all be used as forms of collateral after being appraised by an independent party.

Be sure to consider the risk involved whenever you back your business loans with property. While real estate is one of the most common forms of collateral for business loans, if you default on your loan, you may lose your home. The same holds true for any other property pledged as collateral.

Pie chart reflecting real estate, often used as business collateral, accounting for two-thirds of business owners' assets.

Inventory

One of the unsung forms of collateral business owners can use is their company’s inventory. Keep in mind that conditions apply when it comes to using inventory as small business loan collateral. For instance, the value of inventory may depreciate — some very quickly. These assets may have to be appraised by an independent third party.

Inventory financing is one of the most effective ways to use your business’s inventory as collateral. This financing option involves the business owner taking out a loan for purchasing inventory items that will later be available for sale. However, since the value of the inventory is uncertain and subject to volatility, some lenders may be averse to offering inventory-secured loans.

Invoices

Invoices, or accounts receivables, are fast becoming one of the most popular examples of collateral, offering small business owners who don’t have enough cash on hand a way to secure their loan.

Invoice financing involves lenders accepting outstanding invoices as a form of collateral. For business owners who don’t have the credit score needed to get approved for a loan, invoice financing provides a reliable option for locking down borrowed capital.

For those who need working capital as fast as possible to keep their businesses running efficiently, invoice financing provides a reliable option.

Investments

Securities are another form of collateral considered by banks and other lenders. The following types of securities can be acceptable forms of business collateral because they can be bought and sold on capital markets:

  • Treasury bonds
  • Stocks
  • Certificates of deposit (CDs)
  • Corporate bonds

House, car, paperwork, and piggy bank on hills

Finding Your Best Option for Collateral

No borrower should assume that a secured business loan is automatically the best financing option for them. While it can be convenient, it can present a great deal of risk if you default on the loan. However, those with poor business credit might have no choice but to agree to secure their loan.

Knowing the amount of collateral required for a business loan is mostly a matter of negotiating with your creditor. Usually, business collateral should be roughly equal to the value of the loan in question. From the examples of collateral listed above, consider using whatever you have on hand and can risk losing if the matter of default ever arises.

For instance, if you secure your business loan with your personal real estate, not only does this put your business at risk, but your personal finances as well. Therefore, always exercise discretion before using business collateral to secure your loan.

To Secure or Not to Secure: That is the Question

There’s no way around it: You need cash to grow your business. No matter your industry or what type of company you operate, reliable access to funding is crucial. 

Research your secured and unsecured loan options and determine if a business loan with collateral requirements is best for your business.

 

Erin Ryan Social Community Manager, Senior Writer and Editor at Fast Capital 360
Erin has more than 15 years’ experience writing, proofreading and editing web content, technical documentation, instructional materials, marketing copy, editorials, social copy and creative content. In her role at Fast Capital 360, Erin covers topics of interest to small business owners, including sales, marketing, business management and financing.
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