Owners of small businesses need good credit and a solid business plan. They also need collateral. A loan from a bank, or another business lender will often require collateral. What type of collateral is available to obtain a small-business loan?
You can use any assets that you have to liquidate for collateral, regardless of whether it is a small-business loan or an SBA (Small Business Administration backed) loan. Lenders will have different collateral requirements. Some lenders might require tangible assets such as equipment or machinery, while others may accept intangible assets such future income.
What Are the Different Types of Collateral for Loans?
Business Assets – These assets can be converted into cash easily if needed. Examples include accounts receivable, inventory, machinery, equipment, etc. These assets can be liquidated, if necessary, to repay your loan in full.
Asset-backed Securities – An investment that is backed by consumer loans or credit card debt, an asset-backed security, is one that uses consumer loans to back it. These investments offer several advantages over other securities. They have higher returns and lower risks because they are backed with a reliable source of cash flow. They also carry the risk that account holders may not pay their dues on time or at all.
Stock – Most lenders will accept stock as collateral. However, it must be from a well-established business and can be sold quickly. You should avoid using stock as collateral for your business. The longer it takes to liquidate this type of investment, the less attractive it is.
Assets can be used as collateral for many reasons, including:
It’s Quicker. The lender can immediately use the asset to secure your loan.
It’s Easier. It’s easier to use collateral. There is usually less paperwork. What collateral can I use to get a small business loan? What are the disadvantages of using assets as collateral?
There are some disadvantages to using assets as collateral:
You can lose what you promise. Your lender may take possession of any asset you used to secure the loan amount if you fail to pay it back on time.
Personal Guarantee – These personal guarantees are made by the business owner to ensure that your loan is being serviced. This means that if your loan is not paid on time, the lender can sue you to recover the money owed. Failure to pay back a business loan can lead to serious consequences, including wage garnishment, tax lien filings, bankruptcy, and wage garnishment.
Personal guarantees can be used as collateral for many reasons:
It’s Cheaper. Lenders charge lower interest rates for loans that are backed by personal guarantee than they do on assets. This is because the risk of the money not being repaid is lower. What collateral can I use to get a small business loan? What are the disadvantages of using personal guarantees as collateral?
Lenders will typically require collateral from you. Examples include your car, any property that is insured under a homeowner’s insurance, jewelry, tools, and the work you do (i.e., art), as well as securities like stock options or bonds. If you have assets that can be liquidated quickly to repay the loan, these should be considered as equity or contributions towards repayment.
Personal guarantees are not a good collateral choice.
It’s Risky. Personal guarantees are required by lenders for loans of smaller amounts. This is because it is unlikely that the loan can be recovered from an asset if it is not paid.
The bottom line: What kind of business asset is good collateral? Any asset with value can be used to secure a loan. However, your personal situation will play a major role in choosing the right option. Ask your financial lender about what collateral they accept for small-business loans.
[mpp id=”4″]
Collateral is about being able to sell any assets that you have pledged to repay your loan when due. This usually happens within two years. Although some lenders allow you to pledge multiple types of collateral like equipment and real estate, there are usually limits. All the assets mentioned above can be liquidated to repay your loan when it is due and with interest.
Determining what type of small business loan is right for your business can sometimes be overwhelming and confusing. Progressive Business Capital prides itself in assisting small businesses make the decision that works best for their company and our qualified staff are available to help walk you through your options.
You can still get a small business credit line if you don’t own any assets or goods that could be used as collateral for your loan. For more information on the different types of business loans, contact Progressive Business Capital online or by telephone @ (800) 508 4532 to find out which type of loan is best for you.
