The Different Types of Collateral Used for Small Business Loans

14 Jul, 2016 / Comments: Comments Off on The Different Types of Collateral Used for Small Business Loans / By

There are many things that can be used as collateral for a small business loan as almost anything can serve such a purpose as long as a lender accepts it. Often times, business owners put collateral behind their loan in the case that they do not have a stellar credit rating or would like to receive a lower interest rate and better terms. Loans are usually only as strong as the collateral that is put behind it. If you are a small business owner, then you may be wondering what kinds of collateral you can put up for your business loan. Before proceeding, keep in mind that if you end up defaulting on your loan, the lender has the right to take hold of the collateral and so you must proceed with caution and only put an asset up as collateral if you are sure you can repay the loan. Here are some of the assets that can be put up as collateral for a small business loan.

 

Your Business or Personal Car

You can put up your personal or business vehicle as collateral. However, keep in mind that there must not be any liens on the car and you must have the car’s title in your name. Typically, when you put a car up as collateral, a lender will give you between 70 to 80 percent of the vehicle’s value.

 

Your Home Equity

If you have any equity in your house you can put it up as collateral. Conversely, if you own your home outright then you can put your home’s value as collateral in exchange for a small business loan.

 

Business Assets

Business assets tend to be the most common type of collateral used for small business loans when the business is already established. For instance, you can put your accounts receivable aging report as collateral, which is a list of all of the invoices that are yet to be paid. By pledging these to the lender, in the case that you fail to make timely payments they will collect them directly from your clients. In most cases, a lender will only provide up to 70 percent of your accounts receivable that are less than 90 days old. You likely won’t be able to put up accounts receivable that hasn’t been paid in more than 90 days as it is a sign that you will have problems obtaining the payment.

 

Equipment

The equipment you use to run your company can also be put up as collateral. This includes copy machines and computers. For example, as a restaurant you could put up your fridge units, stoves, etc as collateral. In most cases, these loans are used in the case that you want to refinance or purchase more equipment. The amount you can take out against the equipment, depends on its age. For relatively new pieces of equipment you can borrow as much as 70 percent of its value, whereas older equipment will go for about 60 percent of its value.

 

Important Note

Keep in mind that there typically is a major difference between the value of the asset you put up as collateral and what the lender will value it. This is because in the case that you default on the loan, your collateral must be immediately liquidated, typically at an auction. Due to this, lenders will assess your assets at a rock-bottom price so that they can sell it as quickly as possible. Make sure that you provide detailed, specific documentation noting the worth of the asset when you negotiate for a small business loan. If the lender offers a loan for an exorbitant amount of collateral, then keep in mind that you can renegotiate to come to a better deal. Moreover, you can always refuse the offer of a lender and try a different one.

 

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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