If you are a small business owner and need to borrow some money to expand your business or cover some expenses during the offseason when sales are not as strong you will want to know that some lenders will require collateral to secure the loan. This means a small business owner may have to use some assets for collateral.
As a small business owner, you may be wondering what kind of collateral business lenders might want to see to secure a loan. While the answer to this question can vary depending on the lender, there are some common types of collateral that many lenders will look for. This means a small business owner may have to use some assets for collateral. First let’s look at what types of assets can be used as collateral.
Collateral is an important part of securing a business loan. It’s basically anything that can be used to secure the loan, and it can come in many different forms.
What Assets Can a Business Owner Use as Collateral
A business can have more collateral available to them than they are aware of. Here are some of the most common types of collateral that lenders might want to see:
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Real Property:
One of the most common types of collateral that lenders will look for is real estate. If you own a property, this can be used as collateral to secure a loan. Lenders will often require that you have equity in the property to use it as collateral.
Another common type of collateral is equipment. If you have expensive equipment, such as vehicles or machinery, this can be used as collateral to secure a loan. Lenders will often require that the equipment is in good working condition and that you have the title to the equipment free and clear.
The value of the property can be used to secure the loan, and if you default on the loan, the lender can take possession of the property.
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Accounts receivable (Unpaid Invoices):
This is money that is owed to your business by customers or clients. It can be used as collateral because it represents future income for your business. Commonly known in the business world as Invoice Financing. If your customers or clients are slow to pay and you are needing money to cover daily business expenses, you can leverage those outstanding invoices to borrow money.
Invoice financing is a process where you sell your outstanding invoices to a third party in exchange for cash up front. It’s different than any other form of alternative finance, like bank loans that can have negative impacts on credit scores. Invoice factoring doesn’t allow this because it involves selling an asset instead.
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Cash:
This can be in the form of cash on hand, savings accounts, or certificates of deposit. Typically, you would apply for a savings secured loan from the bank that holds your savings account or certificates of deposit. This could be a high risk for the business owner because the bank could liquidate your account should you default on the loan.
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Inventory:
This is the stock of goods that your business has on hand. It can be used as collateral because it can be sold to repay the loan if necessary. However, with this type of loan you may not be able to borrow the full amount of the inventory because the lender will take into account the depreciation that can occur with inventory.
The type of inventory being offered as collateral is important because a lender wants to know they can sell the inventory easily and without a loss before lending money based a business’ inventory.
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Personal assets:
These are assets that you personally own, such as a home or a car. They can be used to secure a business loan, but the lender can take possession of them if you default on the loan. However, this is usually only accepted if the borrower has a high credit score and a low debt-to-income ratio.
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Blanket liens:
Blanket liens are considered a tangible asset. Tangible assets are defined as any physical assets owned by a company that can be quantified with relative ease and are used to carry out its business operations. These can include any kind of physical properties such as a piece of land that might be owned by a company along with any structure built upon it, including the furniture, machinery …
A blanket lien is different than the other collateral items listed above. A “lien” is actually a legal claim that’s attached to a business loan, and it allows the lender to sue the business and collect its assets in the event of a default. The assets can be specified, or not. This is great for the lender but for the business owner, a blanket lien exposes them to the possibility of losing everything they own.
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How to Determine Which Collateral Works Best for Your Financial Situation
When you’re looking for collateral for your business loan, it’s important to find something that will work for you. You need to consider the value of the collateral, the risks involved and the likelihood that you’ll be able to repay the loan. Collateral can be a great way to secure a business loan, but it’s important to understand how it works before you sign on the dotted line.
If you are unsure of what kind of collateral business lenders might want to see, it is always best to speak with a loan officer or a financial advisor. They will be able to help you determine which assets you can use as collateral and how much equity you will need to have to secure a loan.
Progressive Business Capital offers different types of loans for small business owners and they can review your current situation and help you decide which of those loans may work best for your business financial situation. Please reach out to us to discuss further at (800) 508-4532 or via email at [email protected].
