7 Types of Collateral for Business Loans You Need To Know
For many businesses, taking out a loan is essential for growth and expansion. But before you can qualify for one, you need to have collateral.
Collateral is an asset that can be used to secure a loan. If you default on the agreement, the lender can seize the asset and sell it to recoup their losses. There are many different types of collateral, and the kind you need to have will depend on the type of loan you’re looking for.
This article discusses the value of collateral and the seven most common types that business owners put up against a loan.
How Does Collateral Work?
Most businesses don’t have the cash on hand to pay for large expenses like equipment or expansion — so they need to take out loans. But banks are hesitant to give money to businesses without some sort of guarantee that they’ll get their money back. That’s where collateral comes in.
By offering up an asset as collateral, you’re telling the bank, “If I can’t repay this loan, you can take this and sell it to recover your losses.”
The value of your collateral will be based on the current market value of the asset. If you’re using a piece of equipment as collateral, the bank will appraise it to see how much it’s worth.
The amount of your loan will also be based on the value of your collateral. So, if you’re looking for a $10,000 loan and you have $5,000 worth of collateral, the bank may only be willing to give you a $5,000 loan.
What Types of Loans Require Collateral?
Most business loans will require some form of collateral, but there are a few that don’t. For example, unsecured business lines of credit and business credit cards don’t require any collateral.
That’s because, with these types of loans, the lender is relying on your personal credit score to approve you for the loan. So, if you default, the lender can still come after you for the money.
Loans that necessitate collateral, or secured loans, are typically larger loans with longer repayment terms. Some examples include equipment loans, real estate loans, and business term loans.
If your business does not have adequate collateral to secure your loan, an SBA loan may be a reliable alternative. Note that SBA loans require businesses, and its owners, to make available all collateral they might have. However, SBA loans are not typically declined due to a collateral shortfall.
Types of Collateral For Small Business Loans
Now that we’ve answered the question “What is collateral?” it’s time to discuss the different types of assets that can be used as collateral for a small business loan. The common ones used include:
1. Accounts Receivable
Accounts receivable is money that’s owed to your business by customers. So, if you have customers who haven’t paid their invoices yet, you can use that receivable as collateral.
The bank will typically only allow you to use a percentage of your accounts receivable for this purpose. So, if you have $10,000 in receivables, the bank may only allow you to use $5,000 as collateral.
2. Inventory
If you have physical products that you sell, the value of your inventory will be based on how much it would cost to replace them.
3. Equipment
If you have business equipment, like computers or machines, you can use it as collateral. The value of your equipment will be based on its current market value.
4. Vehicles
This includes cars, trucks, vans, and even boats owned by your business. The value of your vehicle will be based on its Kelley Blue Book value, which is the standard used by lenders to estimate a vehicle’s worth.
5. Commercial Real Estate
If you own the building that your business operates out of, you can use it as collateral. The value of your commercial real estate will be based on its appraised value.
6. Intellectual Property
Intellectual property includes things like patents, copyrights, and trademarks. If you have any intellectual property for your business, they can serve as collateral as well, depending on your lender’s policies.
7. Personal Assets
Sometimes, you may need to use personal assets as collateral for a business loan. This could include things like your home or your investment portfolio.
Using your personal assets as collateral should be a last resort because if you can’t repay the loan, you could lose those assets.
Remember, if you default on the loan, the lender can seize your collateral and sell it. Make sure you only use collateral that you’re willing to lose.
Need a Business Loan? LendThrive Is Here To Help
At LendThrive, we offer fixed-rate business loans with no collateral required. You can get up to $150,000, which you can get in as fast as 24 hours once approved.
We have a fast and easy online application process. You can apply for a loan from the comfort of your own home and get it done within minutes- just another reason why business owners trust Lend Thrive.
We understand that a healthy cash flow is critical. That’s why applying for a loan with LendThrive is easy and straightforward. Check out our loan calculator to get an estimate, or apply now to get the funds you need.
