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If you’re in the market for a small business loan, then your lender may (or may not) require that you put down collateral to secure the loan and minimize its risk. But with numerous types of collateral out there, understanding which option will work best for you can be confusing. After all, each comes with various perks and drawbacks, which can ultimately affect your business and personal finances in numerous ways.
Loans that require collateral are called secured loans. But while collateral can sometimes be necessary or help you unlock a better deal, it’s by no means required. You can also qualify for unsecured loans, which do not require collateral and are approved based on your credit score and financial reporting.
If you’re considering taking out a secured loan, it’s important to be aware of how different types of collateral could affect you. This guide will go over the most common types of collateral and how they affect your small business.
What Is Collateral, and Do You Need it for a Business Loan?
Collateral is an asset that, as the business owner, you put up when receiving a loan (or another type of financing) to lower the lender’s risk. In case you are unable to pay back your debt, the lender will seize your collateral in order to recover their losses. Collateral can take the form of real estate, equipment, inventory, and other options listed below.
Not all lenders will require collateral for a loan. Whether you will have to put up your assets in exchange for financing depends on a number of factors, including your credit history, financials, and the reason you need funds. Because SBA loans are backed by the Small Business Administration, though, most of these programs will require collateral.
In some cases, lenders will allow or require business owners put up their personal assets as collateral.
Types of Collateral to Secure a Loan
Different types of lenders will also have different collateral requirements. Depending on the kind of collateral you agree to put up, you’ll see various benefits and drawbacks. However, this can vary based on your unique situation.
Which Type of Collateral Works Best for You?
There’s no “one-size-fits-all” answer to this question. Only you, as the business owner, can decide which types of collateral for loans is best for your business. A good place to start is by looking into the assets that are available to you.
Do you have real estate, outstanding invoices, or investment accounts with significant value? Consider the assets you have available, and weigh the pros and cons of how putting them up as collateral could affect your finances in the event you can’t make payments. Additionally, be sure to understand what the lender is looking for as far as collateral value goes.
Finally, you want to assess whether using a certain type of collateral is worth the risk. It’s not a good idea to fund a risky venture by putting up your family’s home. Instead, try to a risk level you are comfortable with and confident in.
Should You Offer Collateral to Get a Business Loan?
Wondering whether you should be offering collateral in order to secure a loan? The answer depends on your business’s unique circumstances.
Some business owners may not have enough assets of value to put up for collateral. Others may be uncomfortable with the amount of risk secured loans entail. As a result, many businesses may opt for unsecured loans – which don’t require collateral and are based on other factors, such as credit history.
Collateral financing is a way for business owners who have trouble getting approved for unsecured loans due to their credit score or other factors. However, you can often qualify for unsecured products.
Collateral can help these kinds of business owners secure funding and even qualify for better interest rates, terms, and amounts.
Choose National Business Capital to Get Collateral-Secured & Unsecured Loan Options
Whether you’re considering taking out a secured loan or an unsecured loan, National Business Capital can help. We provide businesses with all kinds of financing options and guide them through selecting the best choice. After applying, a knowledgeable advisor can help you understand your options with or without collateral. We can help you decide whether secured or unsecured financing is a better fit for your business based on risk and the terms you qualify for. You’ll have the opportunity to ask questions and understand your options before moving forward. You can qualify for and receive financing in as little as a few hours. Get started by applying now!
ABOUT THE AUTHOR
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
