When a small business owner is applying for a loan, there are generally certain things lenders will usually look for. For instance, you typically need a good credit score, a healthy financial history, and, often, collateral. Below we detail what collateral is, what it is used for, and why it matters to you.
What is collateral?
“Collateral” is an asset that you offer as security for a loan until you’ve repaid the loan in full. In the event that you’re not able to repay the loan, the lender can take the collateral/asset instead.
When you’re working on an SBA loan application, you’ll generally find that individual lenders require collateral as your contribution back to the loan, in addition to the partial guarantee that the SBA makes.
However, there may be options if you want to get a loan without collateral!
Collateral requirements for a small business loan
Most banks expect some form of collateral from the business they’re evaluating. With SmartBiz® bank partners, this requirement depends on the desired loan amount. For working capital or debt refinance loans from $25,000 to $350,000, a lien - a legal claim to the asset(s) used as collateral - on all available business assets is generally required as collateral up to the loan amount. This lien typically includes assets owned in the business name, an eligible passive company’s (EPC) name, and the guarantor’s name.
Acceptable assets as collateral
There are typically various assets you can use as collateral to secure a loan. These include:
- Personal possessions, like the owner’s home
- Accounts receivable
- Equipment and machinery
- Real estate, including land and structures
- General intangibles not already held by another lender
What are UCC liens?
Before you’re able to secure your loan with collateral, your lender will file a Form UCC-1 (Uniform Commercial Code) Financing Statement with the Secretary of State where your small business is located. UCC filings can cover a single piece of collateral, or the lender can place a blanket lien on all of your business assets, except for vehicles and real estate.
This typically goes on the public record (sharing the identity of both the lienholder and the debtor) and will expire after five years. Should your business default on the loan, the lender will likely be able to foreclose on your property through seizure and sell it — or sell whatever is necessary to pay off the loan — as defined in the UCC.
Collateral helps reduce the risk for lenders
Understandably, it can be scary for small business owners to put so much on the line in order to get a loan. However, collateral exists to protect lenders — because they put a lot on the line. Collateral ensures that borrowers stay committed to making their loan payments on time, and also gives lenders some reassurance that should you default, they’ll recover what they’re owed.
Obtaining funding for your small business can feel like a maze. The SmartBiz team can help! Apply for an SBA loan through SmartBiz and we’ll help guide you through the process.