Collateral is an asset you offer a lender as security for the loan. If you can't repay the loan, the lender can take this asset to cover their loss. In the case of a business loan, collateral may include equipment, inventory, or real estate. In this article, we’ll cover the types of business collateral you may use to secure a loan and how business collateral works so you can make the right borrowing decision for your company.
Key Considerations
- Collateral is an asset pledged to secure a business loan, which the lender can claim if you default.
- Common types of collateral include real estate, equipment, inventory, unpaid invoices, and cash or investments.
- Secured loans require collateral, while unsecured loans do not; some SBA loans under $50,000 may not require collateral. *
Types of business collateral
As you explore lenders, make sure you discuss whether they require collateral and what types are acceptable. Common types of collateral for a business loan include:
- Real estate: If your business owns property—like land, office space, or even a home office—you might be able to use it as collateral. For example, if your office is valued at $300,000, you might use it to secure a loan for a similar amount.
- Equipment: Some common types of equipment, like vehicles, heavy machinery, and certain office equipment, may be acceptable collateral. The lender will want to know the condition and age of the equipment to ensure it's worth the loan amount.
- Inventory: If your business is retail, you may be able to use your inventory as collateral for the loan. Often referred to as inventory financing, you’ll need to work with the lender to assess the valuation of inventory to determine how much you can borrow.
- Invoices: Invoice financing is using unpaid invoices as collateral for the loan. If you have sizable outstanding invoices, you may be able to use those to access cash quickly from certain lenders.
- Investments/liquid assets: If you have money in savings accounts or invest company funds into stocks, bonds, or other assets, you may be able to use it to back a loan.
How does business collateral work?
When you apply for a loan that requires collateral, the lender will likely ask you to sign a lien agreement. This contract gives the lender the right to sell the collateral if you can’t keep up with payments.
There are a few things to keep in mind as you decide which type of collateral is best for your loan.
- The valuation of collateral should match the amount you want to borrow. For example, if your company operates out of an office valued at $300,000, you may be able to use it to secure a loan for $300,000 or less.
- Loan collateral is different than a personal guarantee. If you can’t put up collateral, a lender may give you the option to use a personal guarantee instead. A personal guarantee means the lender can come after your personal assets, not just the business collateral if you fail to make payments.
- The valuation also considers how easy it is to liquidate an asset. For example, a lender can quickly sell off stocks or bonds while selling a specific type of inventory may take longer to offload, making it less valuable to the lender.
- Collateral isn’t the only thing lenders consider when assessing eligibility. In addition to collateral, lenders will also review your business or personal credit history and income to determine your ability to repay the loan. Simply having access to a high-value asset does not automatically mean you’ll be approved for a small business loan.
How much collateral do you need for a business loan?
The amount of collateral you need for a business loan depends on the type of collateral you're using and the lender's requirements. Different types of collateral will result in a different loan-to-value (LTV) ratio. Depending on the lender, you may only be able to access 75% or less of the value of the collateral you provide.
For example, say you want to use a loan to buy real estate that costs $400,000 and plan to use that real estate as collateral to secure the loan. If a lender offers an LTV ratio of 75%, you could potentially be eligible to finance 75% of the property’s value, or $300,000. Since lenders have different LTV ratios and requirements, it’s important to speak with each lender to determine how much money you can access based on your collateral and financial needs.
Do you need collateral for a business loan?
Secured business loans require borrowers to provide collateral to back the loan. In the case of unsecured business loans, borrowers won’t need to provide collateral. Some business loans through the Small Business Administration (SBA) won’t require collateral as long as you’re borrowing a small amount of less than $50,000*. BHG Financial’s business loans are secured by a lien via a Uniform Commercial Code (UCC) filing.
Explore business loan options with BHG Financial
Taking out a business loan is a big decision, but BHG’s concierge support team is available to guide you through our streamlined lending process. With business loans of up to $500,0001,2 and flexible terms of up to 12 years1, you can apply for the amount to suit your business needs. Get started today by viewing your personalized estimate online.
