Collateral for Business Loans: How Much Do You Need?

Unsecured business loans exist, but offering collateral may help you get more favorable interest rates and terms.

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Collateral is an asset that a borrower pledges to a lender to secure a loan. Ultimately, it ensures that the lender isn’t the only one that has something to lose. If the borrower defaults on the loan, the lender can seize the collateral to repay the borrowed funds. Collateral can be a physical asset, such as a home, business real estate or equipment; or a non-physical asset, like accounts receivable or cash in the bank.

Collateral requirements vary from lender to lender and depend on the type of loan you want and how much you’d like to borrow.

What does a business use for collateral?

There are several different types of collateral that businesses can use to secure a loan, but some types of collateral are more desirable than others. The more stable an asset’s price and the easier it is to liquidate, the more valuable it’s considered. For example, real estate and savings accounts are considered more valuable than equipment that depreciates.

  • Real estate: This is any property or buildings the borrower owns, potentially including their home. However, it’s preferable to consider other forms of collateral before putting personal property on the line. Real estate collateral is typically used for long-term loans.

  • Vehicles: Both personal and work vehicles can be offered as collateral, and if the vehicle was financed with money from the loan, it typically counts toward collateral automatically.

  • Equipment: This includes manufacturing and office equipment. For example, you might be able to use an expensive cash register as collateral after the lender estimates its present and future value and confirms that it’s insured.

  • Inventory: Product-based businesses may be able to count their inventory as collateral, depending on how it’s valued. Inventory financing is another option for small-business owners who need funding to stock their shelves. In this case, they’d use the funding to buy inventory, which would automatically be used as collateral.

  • Accounts receivable: If you default on a loan, lenders may be able to use the money from outstanding invoices to pay it off instead. Depending on your lender’s preference, customers buying your products or services may or may not know their payments are being used as collateral.

  • Savings: When it comes to collateral, it’s hard to compete with cash in the bank. While using savings as collateral could result in a better interest rate, be wary of putting personal savings on the line.

  • Personal guarantee: Usually used in conjunction with another form of collateral, a personal guarantee means the lender can seize a borrower’s personal assets to pay off the loan if the other collateral doesn’t cover the sunk cost.

  • UCC lien: In addition to requiring collateral, lenders often file a Uniform Commercial Code lien in the state where the borrower lives. This document establishes a lender's legal right to the borrower’s assets or property if the borrower defaults. Lenders can file liens on specific assets, but many file blanket liens, which give them rights to any business assets necessary to recoup the unpaid loan.

Business loan collateral requirements

In general, how much you offer as collateral depends on your lender, your credit score, how much money you’d like to borrow and what types of assets you have. Matching 100% of your target loan amount in collateral could boost your application’s chances of being accepted, though. And while collateral isn’t required for all SBA, bank and online loans, having it will usually get you better interest rates, terms and loan amounts.

SBA loans

Most SBA loans require some type of collateral, but the Small Business Administration typically won’t turn down an application if collateral is the only factor missing and the rest of the application is strong. And if a business owner applies for an SBA 7(a) loan for $25,000 or less, the lender doesn’t have to request any collateral.

For SBA 7(a) loans over $350,000, lenders must acquire as much collateral as possible from the borrower, up to the loan amount. If the borrower’s business assets don’t reach the loan amount, the lender has the right to tap into the borrower's personal real estate equity as collateral.

All SBA loans also require a personal guarantee from owners with 20% or more equity in the company.

Traditional bank loans

Once the value of your collateral is assessed, some banks will use the loan-to-value ratio to establish how much of the collateral’s value you can borrow against. For example, commercial real estate loan LTV ratios usually range from 65% to 85%. That means the business owner can borrow 65% to 85% of the collateralized real estate value.

Typically, business owners can borrow 60% to 80% of their sellable inventory value.

Online lenders

Online business loans typically have more lenient requirements than traditional loans. Specific collateral may not be required, but a personal guarantee and UCC lien often are. Additionally, access to these loans, which are also usually faster to fund, comes at a price. The application process may be simple, but interest rates are generally much higher than with more traditional loans.

How to get a business loan without collateral

While unsecured business loans exist, they’re more likely to have high interest rates. And keep in mind that even if a lender says it doesn’t require collateral, it may require a personal guarantee or file a lien, which still puts your assets at risk. Here are some alternative forms of funding to consider: