The practice of offering high-value assets as collateral for secured business loans has been around for years—several hundreds of them, actually. And collateral is still very important when it comes to getting approved for financing today. So let’s go over what you can offer up to get a secured business loan.
Property
This is the most common type of collateral used by borrowers. When you apply for secured business loans, you might be asked to put up your real estate assets or home equity as collateral for the loan. When you put up your home or real estate holdings to get a loan for your business, you’re giving the lender permission to seize these assets if you default on your loan.
You might be confident in your ability to pay back your loan, but what if something unexpected happens? What if your business can’t bring in enough money to pay back your loan? You default your overall finances or net worth might take a huge hit. Before you offer up real property as collateral for your loan, make sure you know just how serious these risks really are.
Also remember that real property isn’t just a house. You can also offer equipment, cars, motorcycles, boats, and so on as collateral for secured business loans.
Savings
Sometimes referred to as “cash secured loans” or “passbook loans”, you can also use the saving in your bank account as a collateral for your loan. These secured business loans use the cash you have in your bank to serve as collateral for the loan.
If you default on your loan, the lender can liquidate your account in order to recoup their money. It’s no surprise that lenders prefer to secure loans with this type of collateral. It’s more low risk for them—and if you default, they can instantly get their money back. As an added bonus, they won’t have to go through the hassle of selling a physical asset, such as a house, a piece of equipment, or a car.
It’s also pretty obvious why you should be wary of putting your savings account up as collateral. If you default on your loan, you could lose your entire savings.
Invoices
Many small business owners have a few customers that don’t pay their invoices—and suffer cash flow issues because of it. Those unpaid invoices represent income for your company, and they can be offered up as collateral for loans, too. Many lenders agree to accept collateral based on outstanding invoices through a process called “invoice financing”.
Inventory
If you need business financing to purchase inventory, you can offer inventory up as collateral for your loan. Essentially, the inventory acts as collateral for the loan in case you’re not able to sell your products and default because of it.
Blanket Liens
A lien is a legal claim that comes attached to a business loan allowing the lender to seize and sell the assets of a business in the case it defaults. As the term “blanket” might suggest, a blanket lien is the most comprehensive lien—and the best for the lender. Blanket liens give lenders free reign to take every asset and any form of collateral a business owns in order to get its money back.
Here’s why you should be wary of blanket liens: you can lose everything if you default on your loan, and you’ll have a harder time securing a new loan to fulfill your existing debts if there’s one in place. Lenders want to be in the “first lien position.” If they’re offering a loan to a business with a blanket lien in place, that loan will probably be very expensive.