When evaluating your business loan application, lenders want reassurance that you’ll repay — and that’s where collateral comes in. Although not always required, this type of security can help boost your approval chances, as well as help you access the most competitive rates and terms.
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What is collateral for a business loan?
Collateral is an asset that the borrower pledges to a lender to secure a business loan. Ultimately, it ensures that the lender isn’t the only one that has something to lose.
If you default 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.
Common types of collateral for business loans
Several types of assets can be used as collateral on a business loan. Lenders tend to prefer assets with a stable value that are easy to liquidate, however. Real estate and savings accounts, for instance, are often considered more desirable than equipment that depreciates.
Here are some of the most common assets that are used to secure a loan:
- 🏢 Real estate. This is any property or buildings that you own, potentially including your home. It’s preferable to consider other forms of collateral before putting personal property on the line, however.
- 🚙 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 guarantees and UCC liens
Personal guarantees and Uniform Commercial Code liens (UCC liens) aren’t physical assets like equipment or inventory. Instead, they’re legal tools lenders use to protect themselves if you default.
- Personal guarantee. A personal guarantee makes you personally responsible for repaying the loan. If your business can’t cover the debt, the lender can claim your personal assets (e.g. savings, home, vehicle) to recover its losses.
- UCC lien. A UCC lien gives the lender a legal claim to your business assets. When the lender files a lien with the state, it establishes the right to seize specific assets — or, in the case of a blanket lien, all business assets — if you default.
Some lenders require both a personal guarantee and a UCC lien. Even “unsecured loans” often include one (or both) of these protections, meaning you’re still putting your assets at risk if you can’t repay.
How much collateral is needed for a business loan?
The amount of collateral required for a business loan depends on the lender, loan type and size, as well as your qualifications. Many traditional lenders ask for collateral equal to 60% to 100% of the loan amount, while some SBA and online lenders won’t require specific assets, but will require a personal guarantee.
Keep in mind: Even if it’s not required, providing sufficient collateral can boost your approval chances, as well as help you access the best rates and terms.
SBA loans
Most SBA 7(a) loans require collateral for amounts over $50,000, but smaller loans may not require any.
- $50,000 or less: Lenders are not required to take collateral for these loans.
- $50,000 to $500,000: Lenders must use their standard collateral policies for similarly sized, non-SBA loans.
- Over $500,000: Must be secured with assets being acquired, refinanced or improved by the loan proceeds, as well as additional fixed assets that have value up to the loan amount.
- All loans require a personal guarantee from owners with 20% or more equity in the business.
For SBA 504 loans, collateral is required in the form of a lien on the project property (i.e. fixed asset that the loan is funding).
Traditional bank loans
Traditional bank loans may require collateral covering 60% to 100% of the loan amount, depending on the asset type.
Banks often use a loan-to-value ratio (LTV) to determine how much you can borrow. LTV measures the loan amount compared to the value of the asset securing it.
- Commercial real estate: 65% to 85% LTV (you can typically borrow 65% to 85% of the property’s value).
- Equipment: 70% to 100% of the appraised or resale value, depending on its age, type and condition.
- Sellable inventory: 60% to 80% of inventory value.
- Other secured loans: Some banks may require collateral close or equal to the full loan amount.
Online business loans
Online business loans don’t typically require specific assets as collateral, but most require a personal guarantee and/or UCC lien.
These loans tend to be more flexible and faster to fund. As a result, however, you’ll usually pay higher interest rates and receive shorter repayment terms.
Can you get a business loan without collateral?
It’s possible to get a business loan without collateral. Because these loans are riskier for the lender, however, they may have:
- Smaller borrowing amounts.
- Higher interest rates.
- Shorter repayment terms.
Lenders may also focus more closely on your credit score and business history when underwriting your loan application. And, although unsecured business loans aren’t backed by physical collateral, they may still require a personal guarantee or UCC lien.
Frequently asked questions
Can I use my house as collateral for a business loan?
Yes, you may be able to use your house as collateral for a business loan — but it’s a risky choice. If you default on the loan, you could lose your home. As a result, you’ll likely want to use any and all business assets as collateral, before opting to use your house.
Keep in mind: If you sign a personal guarantee (which holds you personally responsible for the debt), you could still be putting your personal assets, including your home, at risk if you default.
Can I use a 401(k) as collateral for a business loan?
No, you cannot use your 401(k) as collateral for a business loan — as IRS regulations prohibit it. There are alternatives, such as a Rollover as Business Startup (ROBS) or a 401(k) loan, that let you tap into retirement funds for business financing. However, these options carry significant risks.
Can I use my business as collateral for a loan?
Yes, you can use your business as collateral for a loan, but lenders typically secure the loan with specific assets, not the entity itself. Common business assets used as collateral include: Equipment, real estate, vehicles, inventory, accounts receivable and savings.
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