Is Collateral Always Necessary to Qualify for Business Loans?
In the past, collateral was a necessity when it came to applying and qualifying for a small business loan. Most traditional lenders still look for secure assets like equipment or real estate. Frankly, anything of value should work if you happen to default on a loan. However, all of it depends on the particular lender.
What Is Collateral?
If you’re trying to figure out what qualifies as an asset that a lender can use to secure your loan, the SBA has a relatively straightforward definition. Here are some of the assets that qualify:
- Accounts receivable
- Personal assets
Now, you should also consider any assets that end up funded by the loan to be considered secured assets. These are all possible repayments if you default on the loan. Most equipment and other expensive assets can be sold for cash. Sometimes the SBA may secure your loan with commercial real estate.
Generally, when you use your assets to secure a loan, the lender will determine a loan-to-value ratio. For instance, you borrow against the real estate. Keep in mind that every lender does the loan-to-value ratio in a different way.
What Is a Lien on Assets?
In some cases, a lender may require a general lien instead. In this case, the loan is not based on any loan-to-value ratio. Instead, you would be judged on your creditworthiness and financial health in regard to your business. In this type of loan, you may qualify for more than you would have if you tried for a loan that used your assets to secure the financing. When it comes down to it, every lender has different requirements and will ask you for something different. When it comes to general liens, it has everything to do with your financial health and your own personal guarantee.
When it comes to collateral, you aren’t always going to need it to qualify for a business loan. It all depends on the type of loan you receive. If you plan to go with the SBA, they may require you to secure the loan with your assets or your real estate. If you default on the loan, you have to surrender those assets to the lender. In other cases, lenders may simply put a general lien on business assets. The best decision in terms of business financing is to use what’s most comfortable for you and what you can likely pay back.