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.
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.
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.
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:
Business lenders typically accept collateral that includes:
Depending on the assets your business owns, you can choose one or more assets as collateral.
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.
A secured business loan requires the borrower to offer an asset to secure the loan. But not all secured financing takes the same assets.
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.
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.
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.
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.
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.
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.
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:
Backing your loan with collateral doesn’t guarantee approval. A lender can reject your business loan application for any number of reasons that include:
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.
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