When seeking a loan of any kind, a lender may require collateral. But what type of collateral is needed for a business loan, if any, varies dramatically. Today we’ll explore how much collateral is needed for a business loan.
Key Points:
- Collateral is an asset that a borrower pledges as security for a loan. If the borrower defaults on the loan, the lender can sell the collateral to cover their losses.
- Some lenders require collateral to lower their lending risk. After all, the collateral should serve to cover any losses if the borrower defaults on a secured loan.
- But many business owners also prefer secured loans to unsecured loans. With collateral in place, the lower risk for lenders often comes with better financing terms.
- The amount of collateral required for a business loan varies. Some lenders will require a significant amount of collateral, while others won’t require any collateral.
How Much Collateral Do Business Lenders Require?
The amount of collateral required by lenders for business loans varies, as does the types of collateral for loans. But lenders will use a loan-to-value (LTV) ratio to determine how much collateral is necessary. The LTV reflects the amount a lender may be willing to loan you based on the asset’s value.
For example, let’s say that you have real estate to pledge as collateral. Many banks will offer an 80% LTV ratio, which means that the bank is willing to lend you up to $80,000 for a property worth $100,000.
Here are the factors that can affect how much collateral a lender will require:
Credit history: A good business and personal credit history can lead to a lower collateral requirement.
Capacity to repay: Every lender wants to make sure they’ll get their money back. A lower or unpredictable income may lead to higher collateral requirements.
Availability of capital: The access to cash for your business will impact your collateral requirements.
Loan conditions: Collateral makes a loan less risky for a lender. That often translates into better interest rates and flexible loan terms.
How Do Lenders Determine the Value of Collateral?
When determining the value of an asset, the lender likely won’t just take your word for it. Here’s what the process usually looks like.
The lender will likely order an appraisal of the asset to determine a fair market value.
It’s not uncommon for the lender and the business owner to have different valuations in mind.
If there is a major discrepancy between your estimated value and the lender’s appraisal, consider asking for a second opinion. In some cases, the lender will accommodate your request and reorder the appraisal.
What Happens if I Don’t Have Enough Collateral?
If you don’t have enough collateral, there are some steps to can take to obtain funding anyways.
Adjust the loan terms: If you don’t have enough collateral for your original loan amount, consider reducing the loan amount. Or consider accepting a higher interest rate as compensation for limited collateral.
Consider unsecured loans: An unsecured loan doesn’t require any collateral at all. Depending on your situation, this could be a viable opportunity. Take a minute to explore the difference between unsecured vs secured loans before jumping in.
What Types of Small Business Loans Require Collateral?
When seeking out a small business loan, there is a variety of options. Not all loans are created equally. Let’s explore what collateral is needed for a business loan.
SBA loan
So, how much collateral is needed for a small business loan?
Collateral types: Most SBA loans involve real estate as collateral. But other acceptable types include equipment, inventory, and accounts receivable.
Personal assets: In some cases, an SBA loan will require the owner to use personal assets as collateral.
LTV: Typically, SBA lenders offer up to 90% LTV on real estate.
General purpose loan
A general purpose business loan may or may not require collateral.
Collateral types: Real estate, equipment, inventory, accounts receivable, cash, CDs, and more.
LTV: As a borrower, you’ll want to seek out a lender that offers an LTV of 80% or lower.
Commercial real estate loan
Commerical real estate loans can help business owners acquire or remodel a property for their business.
Collateral types: The property that requires a loan will serve as collateral.
LTV: The LTVs offered for this type of loan vary based on the lender. But hard-money loans often offer LTVs of 60% to 80%, bank loans offer up to 80%, and SBA loans offer up to 90%.
Equipment financing
Equipment financing offers businesses the opportunity to use an asset without covering the entire cost upfront.
Collateral types: The equipment itself will serve as collateral.
LTV: Depending on the lender, you can find LTVs for equipment financing of up to 100%.
Inventory
Inventory costs can be a major crunch on your cash flow. Financing opportunities can help you get the inventory you need.
Collateral types: The inventory itself will serve as collateral.
LTV: Depending on the lender, you can find LTVs for inventory financing of up to 50%.
Accounts receivable and invoice financing
If you have a stack of invoices or accounts receivable, those future earnings can serve as collateral.
Collateral types: The future earnings reflected in your accounts receivable or invoices will serve as collateral.
LTV: Depending on the lender, you can find LTVs of up to 80%.
Online business loan
Many online lenders don’t require collateral, but some do.
Collateral could be any of your business’ assets. Lending based on collateral is known as asset based lending. A lack of collateral may require a personal guarantee from the business owner to cover any outstanding debts from their personal assets.
Collateral types: Real estate, inventory, invoices, accounts receivable, equipment, and more.
LTV: Varies
Peer-to-peer loan
Most peer-to-peer loans don’t require collateral.
| Loan Type | Types of Collateral | Loan-to-Value Ratio |
| SBA | Real estate, equipment, accounts receivable, inventory | Up to 90% on real estate |
| General purpose | Most types of collateral accepted | Look for lenders offering LTV of 80% or lower |
| Commercial real estate | Property itself | SBA loans offer LTVs of up to 90% Bank loans offer LTVs of up to 80% Hard-money loans offer LTVs of between 60% to 80% |
| Equipment financing | Equipment itself | Up to 100% |
| Inventory | Inventory itself | Up to 50% |
| Accounts receivable and invoice financing | Expected income in the form of unpaid invoices or accounts receivable | Up to 80% |
| Online business loan | Many do not require collateral. If required, most business assets will suffice. | Varies |
| Peer-to-peer | Most don’t require collateral | N/A |
Do All Lenders Require Collateral for a Business Loan?
No, not all lenders require collateral for a business loan. Here’s what you should expect based on the type of lender.
Banks and credit unions: Most banks and credit unions require collateral for business loans. But some don’t. Consider reaching out to your financial institution to see what’s available.
SBA loans: SBA loans require collateral for loans over $25,000. But smaller loan amounts won’t require collateral through Small Business Administration backed loans.
Alternative lenders: Online lenders usually don’t require collateral. But if you go this route, there is a limited selection of lenders.
Regardless of the lender, those seeking a business loan without collateral should expect relatively high credit requirements. If you have good credit, it’s possible to obtain a business loan without committing any collateral. However, you might find higher interest rates and less attractive loan terms without pledging collateral.
Finding Your Best Option for Collateral
Before you jump into finding the best collateral, it’s important to decide if you want to commit any collateral at all. An unsecured loan won’t require collateral. But you might face less attractive loan terms without collateral to mitigate risk for the lender
● Evaluate what assets you have: Take a minute to consider the assets you have on hand to use as collateral. A few options include cash, bonds, stocks, real estate, equipment, inventory, and more.
● Consider the offered LTVs: With a list of your available assets, check out the expected LTVs for that type of collateral. For example, lenders often provide an 80% LTV for real estate, but that LTV figure is usually lower than 50% for inventory. Based on your financing needs, select an asset that will offer the appropriate loan amount based on your collateral’s value.
Frequently Asked Questions About Business Loan Collateral
Still have questions about how much collateral is needed for a business loan? We have the answers to all of your burning questions.
