How much collateral is needed to secure a small business loan?

A business lender may ask that you back your loan an asset — equipment, real estate or something else in your business’s name that has cash value. You may have an asset in mind you’d like to use, but you’ll want to be sure it’s enough to secure your loan.

How much collateral do I need for a business loan?

With unsecured business loans the answer is simple: None. Secured business loans are a different story.

How much collateral you need depends on how much your business needs to borrow.

Most lenders want collateral that’s worth at least as much as the loan you hope to secure. So if your looking to borrow $50,000 for your business, the assets to secure it must have a cash value of at least $50,000.

If your business can’t repay the loan, your lender can seize and sell your collateral to get the rest of the money it’s owed.

Why do business lenders want businesses to put up collateral?

Business lenders want collateral because it minimizes their risk in taking you on as a borrower. The underwriting process helps lenders decide which businesses to lend to. But it doesn’t always offer enough security for the lender.

If you don’t have strong enough credit or can’t meet all the lender’s requirements, you may be required to provide collateral to make up for it. But even businesses that appear strong on paper can still end up defaulting on a loan. Offering secured business loans that require collateral is one of the ways lenders protect themselves against potential losses.

How do I know how much my collateral is worth?

Lenders often use a loan-to-value ratio to determine how much your proposed collateral is worth. To secure a business loan of $50,000, knowing how your assets are valued by your lender can help you select appropriate collateral.

The type of asset you offer as collateral also affects how much you’re expected to offer up. Lenders value your collateral depending on what its type:

• Real estate. Lenders typically accept up to 75% of a commercial real estate property’s value as collateral.
• Inventory financing. The inventory itself can serve as collateral, but the the loan-to-value ratio for equipment is often 60% to 80%.
• Accounts receivables. Invoice financing requires you to offer your business’s unpaid invoices to secure your loan. The more creditworthy your customers, the better, with lenders typically offering a loan-to-value ratio of up to 90%.

What types of collateral do business lenders accept?

Business lenders typically accept collateral that includes:

• Real property. Most lenders are happy to accept both commercial and personal property, as real estate’s value often stays the same or increases over time.
• Equipment. Equipment loans use the equipment you’re buying to back your loan. Many lenders accept equipment as collateral on unrelated loans too.
• Inventory. The inventory you’re buying can serve to secure the loan. Your lender may require an auditor to appraise the value of your inventory before accepting it as collateral.
• Accounts receivables. Often accepted if your business’s cash flow is tied up in customer invoices. Many like this type of collateral because it’s easy to quickly convert into cash.
• Blanket lien. Low risk for the lender, but high risk for the business. If you opt to secure your loan with a blanket lien, your lender can repossess any asset your business owns if your loan goes into default.
• Cash. A cash-secured loan uses your business’s savings account as collateral. Your business is placed in a lower-risk bracket thanks to the highly liquid nature of cash as collateral. That low risk can mean a lower rate on your loan.
• Personal assets. For startups without many assets, your home, car or investments can secure a loan. But take care: If you default, you risk losing your business and your valuable items.

Depending on the assets your business owns, you can choose one or more assets as collateral.

What types of collateral don’t lenders accept?

Not all assets are created equal. Generally, if you own something that loses value over time or is difficult to trade in for cash, lenders won’t accept it as collateral. For instance, you typically can’t secure your loan with computers or software, because of how quickly electronics usually depreciate.

Must read: Best business loans in Canada

Top 6 business loan types that require collateral

A secured business loan requires the borrower to offer an asset to secure the loan. But not all secured financing takes the same assets.

1. Secured term loan

Secured term loans offer a lump sum payment in exchange for scheduled payments over the term of the loan. Terms can range from 12 months to many years, depending on the lender.

2. Secured line of credit

Unlike loans that pay out a set amount, a line of credit offers the flexibility of tapping into capital when you need it, paying interest only on what you actually borrow.

3. Equipment financing

Equipment loans are designed to cover the cost of vehicles, software and other specialized equipment for your trade. The equipment your business buys with the loan typically serves as collateral.

4. Asset-based financing

This specialized financing is a catch-all, used to refer to business loans backed by such assets as inventory, accounts receivable, machinery and real estate. Asset-based financing can help bridge the gap in cash flow while waiting for payments or cyclical declines in business.

5. Invoice financing

Invoice financing is a form of asset-based lending that allows you to present unpaid customer invoices as collateral for an advance on the amount you expect. It can be useful if your business needs short-term capital to meet daily operating costs.

6. Inventory financing

Similar to equipment financing, inventory financing can take the form of a loan or line of credit used to purchase business inventory. The inventory itself serves as collateral to secure the financing.

Don’t have enough collateral? Here’s what to do next

If you’re turned down by a lender due to insufficient collateral, don’t fret. You can better position your business to secure the funding it needs with action:

• Look for liquid assets. Take another look at your business and personal assets to see if there’s something you’ve overlooked. Lenders are more likely to accept liquid assets like invoices or accounts receivable that can be converted into cash quickly.
• Opt for an unsecured loan. While interest rates on secured business loans are often more competitive, you might find funding through an unsecured business loan if your business has an established credit history.
• Try crowdfunding. If you’re a startup looking for capital, you may be able to get the funds you need with crowdfunding through platforms like Kickstarter or GoFundMe.
• Apply for a merchant cash advance. While expensive and best for emergencies, an advance on your business’s future sales is an option. You repay the advance with a percentage of your daily deposits or credit card sales.
• Take out a personal loan. If you’re unable to secure a business loan, a personal loan for business could be an option. Before you apply, carefully read the loan’s restrictions to make sure you can use your funds for business needs.

I backed my loan with collateral. So why was my application rejected?

Backing your loan with collateral doesn’t guarantee approval. A lender can reject your business loan application for any number of reasons that include:

• Inconsistent cash flow. The steadier your revenue stream, the better. But for small businesses, maintaining consistent cash flow can be a challenge. Stay on top of overdue invoices and use accounting software to keep your records in order.
• Debt load. If you carry debt with other lenders, a potential provider could see it as a red flag. Consolidating your debt may help, but you might need to pay down your existing loans before looking for more funding.
• Not enough time in business. If you’re a startup, you likely lack the assets and cash flow most lenders want to see on a funding application. Luckily, many business lenders specialize in lending to new businesses, giving you options.

Bottom line

Lenders typically want collateral that’s worth at least as much as you plan to borrow. But other factors can affect the amount of collateral you need for a loan, including your business’s age, credit history and financial strength.

Compare your lending options to find the best loan your business is eligible for.

Frequently asked questions

• I have a startup. Can I apply for a secured business loan?

  Yes, but it could be tough to qualify. Some lenders allow you to use your personal assets to secure a business loan if your business doesn’t have any assets to offer as collateral.

  While personal assets can help secure your business loan, be aware that if you default on your loan, your lender can seize them to satisfy the loan.

• What happens if I miss a payment on my business loan?

  It depends on the lender. Some lenders are willing to let a late payment slide, while others might consider your loan in default after a single missed payment.

  Carefully read the fine print of your loan agreement to know how your lender deals with missed or late payments.

• What happens if my business loan goes into default?

  You could end up losing any assets you put up as collateral. When a business loan goes into default, your lender can sell your assets to cover the costs of your loan.