What Is Collateral For Small Business Loans?

Financing options that generally do not require collateral are:

• Lines of credit
• Credit cards
• Short-term loans

Keep in mind that even if a lender doesn’t require specific collateral, many business loans still require a personal guarantee.

Several factors may also determine whether collateral is required. This includes the size of the loan, the borrower’s credit score, and the lender’s policies.

A personal guarantee requires that all owners of a business acknowledge that they will be held personally responsible for the repayment of a loan.

If you sign a personal guarantee, your personal assets can be seized to pay the remainder of the debt owed if you default on a loan. Additionally, a lender can take legal action against borrowers if needed. Keep in mind that a personal guarantee also means that collections, missed payments, late payments, or defaults will appear on the personal credit report of the signers.

For some business loans, a UCC-1 blanket lien might also be required.

A blanket lien gives a lender the legal right to seize any and all of the borrower’s assets if the loan isn’t paid. In addition to tangible business assets like existing inventory and equipment, a lender can also seize your accounts receivables and even your future inventory.

Blanket liens don’t allow a lender to seize your personal assets. The only time you’d have to worry about your personal assets being touched is if you signed a personal guarantee. Be forewarned that most lenders that require a blanket lien also require a personal guarantee.

Commonly required collateral for bank loans includes:

• Business assets
• Personal guarantee
• Blanket lien

Bank loans are popular with business owners because they can be used for almost any business purpose and have competitive rates and terms.

Collateral requirements for bank loans vary. At the very least, a personal guarantee or blanket lien is going to be required. Some lenders may require specific collateral for higher loan amounts — typically in the form of business buildings and equipment or personal real estate and assets.

Commonly required collateral for SBA loans includes:

• Business assets
• Personal assets
• Personal guarantee

Small Business Administration loans are loans that are guaranteed by the SBA. These loans are distributed through intermediary lenders, which include banks, credit unions, non-profit organizations, and Certified Development Companies.

All SBA loans require some form of collateral, even if it’s just a personal guarantee. Business assets are used as collateral, although personal real estate may be accepted in some cases. For the SBA 504 loan program, the collateral is the asset being financed with the loan proceeds.

Even when specific collateral is not required, having collateral can potentially help business owners better qualify for some SBA loan programs.

Commonly required collateral for commercial real estate loans includes:

• The real estate being financed

Commercial real estate loans are used to purchase land or commercial real estate. These loans can also be used to refinance existing commercial real estate loans or to fund additions to existing facilities.

Commercial real estate loans are similar to personal mortgages when it comes to collateral. Instead of pledging something that is already owned, the real estate being purchased with the loan proceeds serves as the collateral. This means that if the business owner defaults on the loan, the land or building can be seized by the lender and sold to pay off the debt.

Commonly required collateral for equipment loans includes:

• The equipment being financed

An equipment loan is used to purchase new equipment needed by a business for operations. Typically, the collateral for this type of loan is the equipment being purchased with the borrowed funds. If the borrower defaults, the equipment can be taken and sold to pay off the remaining balance of the loan.

Commonly required collateral for inventory loans includes:

• The inventory being financed

Inventory loans are a type of financing used to purchase inventory for a business to sell to its customers. If the business cannot sell the inventory and is unable to make the loan payment, the inventory purchased with the loan proceeds serves as collateral.

Commonly required collateral for invoice financing includes:

• Accounts receivables

Invoice financing is a type of loan that is given for unpaid invoices. Invoice factoring allows a lender to pay the business a percentage of the invoice. The lender collects payments for the invoices and, once paid, pays the remainder of the invoice total to the business, minus interest and fees charged for the service.

Invoice discounting is another type of invoice financing. The business is paid a lump sum for the unpaid invoice, which is generally 90% to 95% of the total amount. Once the business collects the payment from the customer, the loan is paid back to the lender, along with the remaining percentage for interest and fees.

With both types of invoice financing, the unpaid invoices serve as collateral.

Common types of assets used as collateral include real estate, buildings, equipment, vehicles, inventory, accounts receivables, future sales, and cash reserves.

Collateral is not required by every lender to get a working capital loan. However, you might have to agree to a blanket lien or sign a personal guarantee even if specific assets aren’t required.

You can generally get a loan with collateral if you have bad credit. Lenders are more willing to lend to you if they have collateral to collect in the event that you default on your loan.

A personal guarantee may be used in conjunction with or in lieu of specific collateral. By signing a personal guarantee, you are telling the lender that you can be held personally liable for the loan if it goes into default. With a personal guarantee, lenders can seize personal assets as needed to recover funds lost to a defaulted loan.