The 7 Types of Collateral You Can Use to Get a Business Loan

Many business loans, or lenders, will require you to put up collateral in exchange for financing. While using collateral can bring about various benefits, it’s important to be aware of the potential drawbacks as well.

The good news is that, when it comes to collateral, you have many different options. We’ll go over the top 7 types of collateral for a business loan and each of their characteristics.

What is Collateral and Why Would You Need it for a Business Loan?

Collateral is an asset that you put up in order to secure a business loan and lower the lender’s risk. Lenders are then able to seize your asset(s) and recover their losses if you default on your debt.

Because collateral helps lower risk for the lender, it may also help you access lower interest rates, higher funding amounts, and better terms. Other times, lenders may require collateral if your financial metrics are lacking in one or more key ways.

Keep in mind that using collateral comes with certain risks. Most significantly, you’ll jeopardize losing the asset if you’re unable to repay your loan.

Business loans that are backed by collateral are called secured loans, while those that aren’t are called unsecured loans. For unsecured loans, your credit score, revenue levels, and other financial metrics will have more weight.

7 Types of Collateral to Secure a Loan

Collateral requirements will vary according to the lender you work with. For example, banks are much more likely to request collateral than online lenders. If you do decide to use collateral, here are some of the most common types of assets frequently used to secure business financing.

1. Real Estate

Real estate is one of the most popular forms of collateral. Lenders frequently accept real estate because it holds value well over time and is also typically worth several hundred thousand dollars. This in turn gives you, the borrower, an opportunity to secure more funding.

However, make sure to thread carefully before using your primary residence as collateral. Should default on your loan, you could risk losing your home.

2. Business Equipment

Business equipment is another common form of collateral, especially for construction or manufacturing businesses. The downside is that business equipment tends to lose its value over time. If you own machinery that’s undergone significant wear and tear, you may have a harder time securing a high funding amount.

3. Inventory

Many merchants or retail stores will use their inventory to secure financing. While this is a common practice, not all lenders will accept invoices as a form of collateral. In some cases, invoices can be difficult to sell off for cash.

4. Invoices

Outstanding invoices and late payments can create major liquidity problems for businesses. It’s one of the reasons there’s an entire branch of financing dedicated to this issue, called invoice financing.

Aside from that, invoices are also a popular form of collateral and can be a great way to get much-need cash quickly, without having to wait for your customers to pay you.

5. Blanket Liens

Blanket liens give lenders the legal right to seize any and all of your business’ assets if you’re unable to repay the loan. This is a common form of collateral at banks, but not so much at online lenders.

Blanket liens can pose serious risks for borrowers. In some scenarios, it’s possible to lose everything you own if you don’t meet your debt obligations.

6. Cash

If you have extra cash in your bank accounts, you could be able to use it to back a secured loan. Cash is a relatively straightforward type of collateral and also a favorite among lenders. Plus, using cash as collateral may even allow you to qualify for lower rates and fees.

Investments

Investments, like stocks and bonds, are oftentimes used as collateral for both business loans or other types of financing. Like cash, investments are liquid assets that can be sold off quickly to repay lenders.

The downside is that, in the event of a market crash, you could find yourself in a problematic situation if the value of your investments decline below the amount you borrowed.

Which Type of Collateral Works Best for You?

As you work through which type of collateral is best for you, a good place to start is by looking into the assets that are readily available.

Do you own real estate, outstanding invoices, or investment accounts with significant value? Make sure to weigh the pros and cons of each and consider how your business, and your personal finances, will be affected if you are unable to make your payments.

Find the Best Business Loan Options at National

Whether you decide to move forward with putting up collateral, or secured financing, it’s nonetheless helpful to have options. If you’re looking to compare the best rates on business loans, consider using National.

National is the top online business financing marketplace that provides businesses with all kinds of financing options and guides them towards selecting the best choice.

We can help you decide whether secured or unsecured financing is a better fit for your business based on your risk and the offers you qualify for.

Learn about the small business financing solutions that your business could qualify for! Apply now!