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Collateral Required for Different Business Loans

Collateral Required for Different Business Loans

When applying for a business loan, most lenders will require that you put up some form of collateral to secure the loan. Collateral acts as a secondary source of repayment if you are unable to make your loan payments. The type and amount of collateral required can vary significantly depending on factors like the loan type, loan amount, your credit score, and more.

What is Collateral?

Collateral refers to business or personal assets that you pledge to the lender if you default on the loan. If you are unable to repay the loan as agreed, the lender can seize the collateral, sell it, and use the proceeds to recover their losses. Common types of small business loan collateral include:

  • Real estate – Commercial property, vacant land, residential property
  • Equipment – Machinery, vehicles, office equipment
  • Inventory and accounts receivable
  • Cash savings – CDs, money market accounts
  • Investment accounts – Stocks, bonds, mutual funds
  • Personal assets – House, car, jewelry, etc.

Lenders prefer types of collateral that are easy to value and liquidate if needed. Putting up collateral also signals to the lender that you are willing to take on some risk yourself in order to secure financing.

Loan-to-Value Ratio

An important factor lenders consider when setting collateral requirements is the loan-to-value (LTV) ratio. This compares the amount of the loan to the appraised value of the collateral pledged. For example:

Loan amount: $100,000
Collateral value: $150,000
LTV ratio: $100,000/$150,000 = 67%

A lower LTV ratio signals less risk for the lender. Typical maximum LTV ratios are 50-90% depending on the loan type.

SBA Loans

Small Business Administration loans help entrepreneurs and small business owners get access to funding they may not qualify for with traditional lenders. The SBA guarantees a portion of the loan to the lender, reducing their risk.

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Guerline Menard
Guerline Menard
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Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
Taïko Beauty
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I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
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Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
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I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

Collateral required: SBA 7(a) and 504 loans may use business assets, personal assets, or both as collateral depending on the loan size and other factors. Low-doc SBA Express loans up to $25,000 do not require collateral.[1]

Conventional Bank Loans

Getting a term loan or line of credit from a traditional bank likely involves putting up collateral. Banks mitigate their lending risk by setting strict collateral rules.

Collateral required: Bank loans often use real estate, business equipment, and personal guarantees as collateral. LTV ratios of 80% or less are common.[2]

Alternative Online Lenders

Online lenders have emerged as an option for securing small business financing quickly and easily. Approval is based more on business performance data than collateral assets.

Collateral required: Many alternative lenders only secure loans with a blanket lien against business assets instead of specific collateral.[3]

How Much Collateral is Needed?

The exact collateral coverage a lender requires depends on multiple factors:

  • Loan type – SBA and conventional loans often require up to 100% collateral coverage. Alternative lender loans less so.
  • Loan amount – Larger loans typically need more collateral pledged.
  • Business credit/financials – Stronger profiles allow lenders to ease up on collateral requirements.
  • Collateral type – Easy to value/liquidate assets preferred (real estate, securities, etc.).

Talk to multiple lenders to shop around for the best collateral terms for your situation.

Using Personal Assets as Collateral

Some lenders allow or even require that business owners put up personal assets like houses, cars, investment accounts, etc. as collateral. This gives the lender recourse to seize those assets if the business defaults.

Before pledging any personal assets, carefully consider the risks involved. If the business fails and the lender liquidates your personal property, your finances and credit could take a major hit.

Collateral Tips

If your business needs to put up collateral for a loan, keep these tips in mind:

  • Work with lenders willing to accept assets you have available, even if less conventional collateral like accounts receivable or equipment.
  • Only pledge assets you could afford to lose as lenders will likely liquidate collateral in a default situation.
  • Ask the lender to release collateral as you pay down the loan principal.
  • Get assets appraised to ensure accurate valuation – don’t rely on your own estimates.
  • Read loan documents carefully to understand the lender’s rights regarding seizing and liquidating collateral.

Other Financing Options

If your business doesn’t have significant assets to pledge for a secured loan, consider alternative funding sources like:

  • SBA grants – Government grants don’t require repayment or collateral.
  • Crowdfunding – Raise funds by getting smaller investments from a large number of backers.
  • Angel investors – Get financing from high net worth individuals in exchange for equity.
  • Venture capital – VC firms provide funding to early-stage, high-growth startups.

Just keep in mind that these equity financing sources do take a portion of ownership in your company.

As you can see, collateral requirements vary quite a bit depending on your specific situation. Evaluate both the pros and cons of putting up assets to secure financing. And explore all of your business loan and funding options to find the best fit.


[1] U.S. Small Business Administration Loan Programs

[2] How Much Collateral Is Needed For A Business Loan?

[3] What is Collateral And Do I Need It For Business Loan?

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