Business loans come in two forms – unsecured and secured. Unsecured loans do not require any form of collateral offering, which makes them riskier to the lender. Secured loans, on the other hand, come with collateral requirements, and the amount and type of collateral you’ll have to put up varies by the type of loan you select.
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What is Commercial Lending Collateral?
Commercial lending collateral describes an asset(s) that you put up as security when taking out a business loan. The assets provide an added layer of protection for the lender since they can recoup them if you fall behind on the loan payments to minimize financial losses.
Usual Types of Collateral for Business Loans
The collateral requirements for business loans vary by the type of financing you select.
Real estate collateral is commonly used to secure business loans. More often than not, it’s worth a sizable sum of money, which is why lenders accept this form of collateral. But, as a business owner, there’s a major drawback – you could lose your property if you default on the loan agreement. This could be problematic if the only type of real estate you have at your disposal is the home you currently live in, so proceed with caution before offering it as collateral to get business funding.
Business equipment is another form of collateral lenders may accept. However, keep in mind that you may not be able to access as much capital as you need due to the depreciation of your equipment’s value. Furthermore, the lender may be reluctant to accept the equipment because of the challenges associated with selling the asset if you fall behind on payments.
If you have inventory or stock on hand, you may be able to use it as collateral. But, like business equipment, lenders might not accept it if the merchandise is difficult to resell. You should also consider the risk you’ll assume by putting it up for collateral if you fall on hard times, particularly if it’s the lifeblood of your business.
You can sell the rights to your future invoices in exchange for cash in the short term. The upside is you can keep operations afloat, but there’s also a significant disadvantage – you’ll generally pay a hefty sum of interest or fees, which means you’ll technically make less money on the sale of those goods or services.
Using cash as collateral can unlock competitive financing opportunities for your business. Still, you risk losing a sizable portion of your reserves immediately if you fail to repay what you owe.
As the name implies, blanket liens cover all of your company’s assets. Consequently, this form of collateral should only be used as a last resort, as you risk losing your entire company if you fall behind on payments.
Stocks, bonds, and other investments in your portfolio are another form of collateral lenders will accept when seeking a business loan. But, if they’re a part of your nest egg, it probably isn’t a good idea to put investments you own up for collateral.
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Should You Secure a Loan with a Collateral?
It varies by the business owner and the number of assets they have available to use as collateral. If you can put up a sizable amount to secure a loan, it may be worthwhile if the offering will help you qualify for more funding or better loan terms. Alternatively, if you have little to no assets at your disposal to put up for collateral, a secured loan likely won’t make sense for your business.
How Much Collateral Do Lenders Usually Require?
Again, it depends on the type of loan you select. Some lenders will also analyze your company’s financial health, credit history, and the number of years in business to decide on the amount of collateral you’re required to put up to get a secured loan.
How to Know Which Type of Collateral Works Best for You
The ideal type of collateral to secure a business loan depends on the assets the business owner has available. It’s equally vital to assess if you can afford to put them up for collateral without risking your company’s financial health.
Get Secured and Unsecured Loans for Your Business
National Business Capital is a FinTech platform featuring a marketplace of 75+ lenders committed to helping you secure the best funding option for your business. They can connect you with flexible loan products that meet the needs of your business and, more importantly, find the RIGHT lender for your specific circumstances. Plus, you can choose from an assortment of different financing solutions to your challenges, including:
- Small business loans
- Business lines of credit
- Equipment financing
- Hybridge SBA Loan
- Performance Advance
- eQuickment Financing
- CannaBusiness Financing Solution
- Asset Based Lending
- SBA Loans
- Accounts Receivable Financing
- Loans for Doctors and Dental Practices
- Merchant Cash Advance
- Franchise Financing
- Purchase Order Financing
- Commercial Mortgage Financing
If you’re ready to soar your business to new heights, here’s how to get started:
- Submit the digital application with just a few clicks. It’s simple, streamlined, and won’t impact your credit score.
- Connect with a Business Finance Advisor from the National Business Capital team and view potential loan offers from lenders in the lending network. They will assess your company’s needs to help you find the best fit.
- Finalize your loan application and get funded. Some borrowers receive loan proceeds within hours of being approved, but it depends on the loan product you select.
Apply now to take the first step towards securing the capital your business needs and deserves.