Understanding How Business Collateral Loans Work and Where to Get One
For small businesses, securing adequate funding is critical to growth and success. Whether expanding your operations, purchasing new equipment, or hiring additional staff, access to capital can be a game-changer. However, options from traditional lenders are not always easily accessible or favorable for small business owners, particularly if you have limited credit history or fluctuating revenue streams.
Fortunately, business collateral loans offer an alternative avenue for small business owners. This type of business financing leverages valuable assets as collateral, allowing you to tap into previously untapped financing resources for your business needs.
In this article, we'll cover the basics of business collateral loans, what assets are used for collateral, and where you can get a collateral loan.
What Is a Business Collateral Loan?
Collateral is when something is pledged as a security to repay a loan. In other words, it’s a type of assurance for the lender in case the borrower defaults.
Business collateral is an asset a company has and promises to give to a lender if it can’t repay a loan. The collateral serves as a type of security for the loan, which is why collateral loans are also called secured loans.
Because borrowers are reducing the lender's risk by offering up the asset or assets, collateral loans allow businesses to finance large purchases. However, if the loan isn’t paid off, the borrower risks their assets being confiscated.
How Does a Secured Business Loan Work?
If you want to get a secured business loan, or business collateral loan, you sign a lien agreement for the asset you are putting up for collateral. This document outlines the lender’s right to your property if you don’t pay back the loan. You keep the collateral as long as you make all of the repayment terms.
In most cases, you’ll be asked to put enough collateral to cover the loan amount. You may have to put up more than one form of collateral.
Besides collateral, the lender may also ask borrowers for a personal guarantee. This is when you put forth your personal assets to pay off the loan if the other collateral doesn’t cover the lender’s losses.
The lender may have specific collateral requirements. Most of the time they will require an appraisal of the assets you put up as collateral, which may require extra fees and time.
For example, Small Business Administration loans may require some type of collateral, but you don’t need it if you apply for an SBA 7(a) loan that is $25,000 or less.
What Is Acceptable Collateral for a Business Loan?
There are many different types of assets that can be put up as collateral, including personal assets like a house and car. Some of the most common are:
Accounts receivable: These are your invoices or the money that customers owe you for products or services received.
Savings: If you have a personal savings account, you can put up the account as collateral in exchange for a business loan.
Inventory: Unsold items or goods can also be put up as collateral. If you need funding to purchase stock, you can also consider inventory financing, where you use the funds to buy inventory, and then the goods are automatically used as collateral. You can use this type of loan to cover any seasonal or cash flow gaps in your business.
Real estate: If you own any type of property, you can put it up as collateral for a loan. You can use your house or even commercial real estate that is owned by the company.
Vehicles: You can offer both personal and work cars as collateral for a loan. If you buy a car with the money from the loan, it usually is counted as collateral.
Equipment: Similar to real estate, equipment can be used as a tangible asset to get a loan. You can even get equipment loans, which can be used to purchase any equipment you need for your business.
Blanket lien: This is a type of security that will collateralize all assets of a business, essentially giving the lender the right to seize all of your business assets in the event of a default.
Can you put up a business as collateral?
While you can’t put up your business itself as collateral, you can put up the assets it owns. For example, if your business owns a lot of real estate or has a lot of accounts owned, you can put those up as collateral.
Where to Get a Business Collateral Loan
There are many ways to get a secured loan. You can put up collateral at a traditional bank if they won’t give you a business loan without it. However, getting a loan at a bank can be difficult if you don’t have a great personal credit score. In many cases, the bank will use a loan-to-value ratio to determine how much of the collateral you can borrow against.
Online lenders are a bit easier to get loans from, as their requirements tend to be a little less strict. In some cases, you may not need any collateral at all to get a loan. A personal guarantee may be enough to get funding. However, depending on the online bank, you may have to pay higher interest rates than you would at a traditional bank.
Pros and Cons of Business Collateral Loans
Collateral loans are a great option for companies that are still trying to build their creditworthiness, but they aren’t for every business. If you're considering a business collateral loan as a financing option but aren’t sure if it’s right for your business, consider these pros and cons.
Pros of Business Collateral Loans
Access to funding: Collateral loans can give you access to capital that might otherwise be challenging to obtain through traditional banks or lenders.
Higher loan amounts: By leveraging valuable assets as collateral, you can secure larger loan amounts.
Potentially lower interest rates: Collateral loans may come with lower interest rates compared to unsecured loans since the collateral serves as security for the lender.
Flexibility in use of funds: Collateral loans generally offer flexibility in how the funds can be used, providing you with the freedom to allocate capital according to your business's specific needs.
Cons of Business Collateral Loans
Risk of collateral loss: If you fail to repay the loan, the lender can seize and sell the collateral to recover their losses, potentially resulting in the loss of valuable assets.
Limited asset accessibility: By pledging assets as collateral, you limit your ability to use or sell those assets during the loan term.
Valuation challenges: Determining the value of collateral can be subjective and may require professional appraisals, adding time and cost to the loan process.
Higher level of due diligence: Lenders may require extensive documentation and evaluations of the collateral, adding complexity and administrative burdens to the loan application process.
Get Business Financing Without Collateral
Business collateral loans are a great option for small business owners who need funding but are struggling to get a loan approved. While business collateral loans offer a valuable avenue for small businesses to secure the funding they need, not all business loans require collateral. Some online lenders offer small business loans without the need for collateral. And there are even some alternative financing options.
At Backd, for example, you can get up to $2 million of a working capital advance with flexible repayment terms and no collateral required. Or you can apply for a business line of credit. This gives you access to financing when you need it. It’s a revolving line of credit, meaning when you pay back the money, you can borrow it again as needed.
Apply today and find out in just 24 hours if your business qualifies.
