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What Is Business Collateral?

Updated Oct 23, 2023

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Business collateral is property or other assets that a business can use to secure a loan. If the business fails to repay a loan secured by collateral, the lender can seize that collateral and sell it to try to get their money back.

Most business loans require some sort of collateral. If your business doesn’t have collateral that can be pledged to secure a loan, you will likely pay a higher interest rate or get less-favorable terms because the loan represents more risk for the lender.

What is collateral?

Collateral is an asset that a business can use as security for a loan. To be used as collateral, the asset can’t already be pledged against an outstanding loan or have other claims against it. The business must also own and control the asset to pledge it as security for a loan.

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Businesses typically need collateral to qualify for certain loan products. Assets that you can pledge for a loan allow you to qualify for better terms and lower interest rates, because the assets protect the lender — if you default on the loan, they can get their money back by selling the collateral.

Real estate is frequently used as security for business loans, but loans can also be secured by equipment, inventory or company receivables. The more tangible the asset is — meaning the closer it is to cash and the more stable its value is — the more security it offers the lender.

Key TakeawayKey takeaway

Most business loans require some form of collateral to secure the loan before funding is delivered. This can be real estate, equipment, accounts receivable or some other asset.

How collateral works with business loans

When you apply for a business loan, you need to tell the lender whether you’ll be securing the loan with collateral and, if so, what assets you’ll be using. This property — whether it’s an office, storefront, warehouse, vehicle or equipment — must be owned by your business. If you’re applying for a loan in order to purchase one of these assets, your loan will be secured by the asset you’re purchasing almost by default (unless the lender asks for collateral on top of the asset being purchased).

Then, when you’re executing your loan documents, you’ll be required to sign a lien agreement, effectively giving the lender a claim against the collateral securing the loan. If your business later defaults on the debt, the lender can file to foreclose on the collateral and then sell it to recoup any unpaid loan balance.

If there’s any money left over after the lender sells the collateral, your business will get the rest, though there usually isn’t anything left after the lender recoups legal fees and accrued interest and penalties.

If the collateral is the only thing securing the loan, that’s the lender’s only recourse. But most small business owners also have to personally guarantee loans for their businesses. This means that if the lender doesn’t recoup all of their money after seizing and selling your business’s collateral, they can sue you personally for repayment of the remaining balance. [Considering other financing options? Read our guide on how to choose a business loan.]

What qualifies as collateral?

To qualify as good collateral for a business loan, an asset needs to be owned and controlled by your business. It also must be in good working order, have a reliable value and not be subject to any claims from other lenders or other parties.

These are common examples of collateral for business loans:

  • Real estate: This is most often an office, store, warehouse or other facility, though it can also include residential property being rented or developed.
  • Inventory: Borrowing against inventory is extremely common for retailers, which then need to provide updated inventory lists to their lender periodically so the lender can ensure the loan remains properly collateralized. If the retailer has sold down its inventory and not restocked, it may need to pay down the loan.
  • Equipment: This can include business vehicles; heavy equipment, like cranes; office equipment; and even furniture.
  • Receivables: A receivable is money that a customer owes you for work or a product you already delivered. Receivables that are less than 90 days outstanding are usually sound collateral for lenders, which consider these receivables almost the same as cash.

Generally, you must secure business loans with some type of collateral. Some lenders provide loans with just a personal guarantee as collateral (a signature line of credit, for example), but these loans are very rare and typically reserved for a lender’s preferred customers, who often have high net worth or high incomes.

How much collateral do you need?

The amount of collateral you need to get a loan depends on your credit profile, your business’s industry, your intended use for the loan proceeds and other factors. These factors help a lender judge the overall safety of a loan and the likelihood that you’ll repay it. Generally, most lenders won’t loan more than 80 percent of an asset’s value; this protects them in case the asset’s value declines or they have to seize and sell it in a fire sale.

Because lenders won’t lend more than 80 percent of the collateral value, the amount of collateral your business needs depends on how much you want to borrow. Typically, you need to pledge collateral worth at least 25 percent more than the amount you need to borrow. So if you want to borrow $10,000, you should plan to secure the loan with at least $12,500 worth of collateral.

However, if you have bad credit, defaulted on a loan, filed for bankruptcy or run a high-risk business, the loan may represent greater risk for the lender and thus may require additional collateral.

Some lenders don’t require collateral. To learn about a business loan provider that doesn’t ask for collateral, check out our review of Rapid Finance.

Key TakeawayKey takeaway

The value of collateral a lender requires depends on the total value of the loan you apply for, your business’s credit profile and your personal credit history.

What types of business financing require collateral?

Almost all business financing requires some form of collateral. The type and amount of collateral required vary by the type of financing, your business’s credit profile and your business’s industry.

Collateral ratios by financing type

Type of financing

Maximum loan-to-value ratio

Small Business Administration (SBA) loan

90%

Business line of credit

90%

Commercial real estate loan

75%

Equipment loan

75% (special dealer financing may be higher)

Inventory financing

50%

Receivables financing

80%

Very few types of business loans don’t require some form of collateral. Credit cards are one type that don’t, although collateral may still be required for borrowers with bad credit who need to start with a secured credit card. The only other common type of business loan that doesn’t require collateral is an unsecured line of credit, but these typically charge higher interest rates than other secured options and are often available only to the lender’s preferred customers.

The best business loans

We reviewed some of the best business loans in the small business lending space so you don’t have to. Our list includes some picks that require business collateral and offer only secured loans, as well as some lenders that are willing to issue unsecured loans. Here’s a look at some of our favorites from each category.

Business loan providers that require collateral

Here are some of our picks for the best business loan providers that offer secured loans when you provide some form of collateral:

  • BusinessLoans.com: Our review of BusinessLoans.com found a wide range of loan options ranging from $5,000 to $1 million in value. With flexible repayment terms on short- and long-term loans, BusinessLoans.com has a range of choices for businesses in a variety of circumstances. There is no minimum credit score to qualify, but you will need to generate at least $100,000 in revenue annually.
  • Crest Capital: Our Crest Capital review found the lender to be an especially good fit for equipment financing. Crest Capital offers loans between $5,000 and $1 million in value, with short repayment periods spanning 24 to 84 months. You can even secure your funding as quickly as the same day, though you will need a minimum credit score of 650 to qualify.

Business loan providers that do not require collateral

If you’re not willing or able to put up some form of business collateral, you still have options, though you should expect higher rates. These lenders are among our best picks for unsecured loans:

  • Fora Financial: In our Fora Financial review, we found that the lender specializes in short-term loans ranging from $5,000 to $1.5 million, with repayment periods of up to 15 months. If you qualify, you can receive funding in as little as 48 hours. You’ll need a credit score of at least 500, $15,000 or more in monthly sales, a minimum of six months in business and no open bankruptcies.
  • Biz2Credit: When we conducted our Biz2Credit review, we found this marketplace lender to offer a wide range of great loan options up to $6 million. To qualify, you’ll need a credit score of at least 660, a minimum of 18 months in business, and $250,000 or more in annual revenue. If you do qualify, you’ll be able to secure funding within 24 to 72 hours. 
  • SBG Funding: In our SBG Funding review, we found the lender to be one of the most flexible we examined. It offers loans of up to $10 million, with repayment periods ranging from six months to 10 years. To qualify, you’ll need $100,000 or more in annual revenue, a credit score of at least 600 and a minimum of six months in business.
  • Noble Funding: Our review of Noble Funding found that the lender excels in customer service. It offers loans of $100,000 to $35 million, and repayment periods vary depending on the details of your loan. To qualify, you’ll need $250,000 or more in annual revenue, no liens or bankruptcies, a credit score of at least 650 and a minimum of 18 months in business.

If you need a loan, collateral can lower your interest rate

If you want to reduce the amount you spend in interest when securing funding for your business, consider choosing a secured loan and putting up some business collateral. While you must place an asset at stake, these loans are generally safe if you can meet your monthly payments. And thanks to the collateral to secure the lender’s investment, your interest rate will be markedly lower. In the end, choosing a secured loan over an unsecured one, if possible, can save you a significant amount of money.

Tejas Vemparala contributed to this article.

Dock Treece
Contributing Writer at businessnewsdaily.com
Dock David Treece is a finance expert who has extensively covered business financial topics, including Small Business Administration (SBA) loans and alternative lending. He is the Senior Vice President of Marketing at BNY Mellon and the former Editorial Manager at Dotdash. He also previously worked as a financial advisor and registered investment advisor, as well as served on the FINRA Small Firm Advisory Board. Dock brings more than 17 years of experience, including his time as an entrepreneur co-founding and managing a small business. His entrepreneurial background gives him firsthand insight into the challenges small business owners face and the tools and tactics they can use to succeed.
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