Potential Collateral Options for Your Business Loan

By Karlene Sinclair-Robinson

Financing your business growth or survival is vital. IF you can get the money you need, good for you. Many business owners end up using collateral they did not plan on pledging. Some end up being denied due to insufficient collateral.  Make sure this does not happen to you!

Many banks or alternative funders require a variety of collateral depending on the loan amount and the type of loan you are seeking. Each financing source relies on their approved collateral types to make a given loan.

Types of Collateral

1. House – your house will always be a prime piece of collateral. It is the best source to use for many business owners. The lender will multiple the current value of your property with a given percent, e.g.: 75% and then subtract the outstanding mortgage amount. This formula determines the maximum amount the lender is willing to approve. For some financing option, this collateral is not a good fit.
2. Vehicle – banking sources, in most instances, will not accept this as acceptable collateral.
3. IRAs – Individual Retirement Accounts are not acceptable collateral for banks. Instead, depending on the type of account, this collateral could be used with non-traditional financing sources. Be sure to check with a qualified source.
4. CDs – Certificates of Deposit are always a qualified collateral type. This is cash that can be accessed according to the terms set forth in the CD.
5. Stocks – are considered applicable types but check with your lender. They might or might not accept the stocks you present. Their valuation of the stocks will be assessed between 50% – 90%.
6. Accounts Receivable – are often acceptable but must be assessed by the financing source. This is based on a number of factors. For example, some financing sources will not accept medical or construction receivables, so if your company operates within these industries, your receivables might not be approved.
7. Equipment – is used based on type. Heavy duty equipment is acceptable based on the collateral’s depreciated value multiplied by a given percent, e.g.: 50%.  Of course, any equipment with debt against it will not be accepted.
8. Inventory – is not normally not an acceptable collateral, especially perishable items. Depending on the financing source and the inventory type, a business owner just might be able to use this to their benefit.
9. Jewelry – is not an acceptable collateral type.

Knowing what collateral a source will accept is important. Understanding your financing source is also critical. What a bank will require will not necessarily be the same as what a non-traditional funder, such as a micro-lender or a factoring source, will accept. Be prepared by understanding what they are looking for when compared to what you own.