Traditional lenders have typically required secured assets before they grant small business loans. These banks and other financial institutions search for assets to offset the risk they take by providing you with a loan. These are things you should know about small business loan collateral.
Business Asset Lien
Some lenders will place a lien against your business, including its assets, to secure a loan. In this case, no specific assets are named in the loan documents, but your business assets, in general, are used. You may also have to sign a personal guarantee, placing your personal assets at risk if you default on the loan.
Although these loans are faster, they have a greater personal risk for you. Your creditworthiness and your company’s credit profile are both evaluated. You may be granted more credit than you would with other types of loans.
These types of loans are especially valuable for newer small businesses without a lot of assets. However, you could lose your business entirely, not just a few assets.
Banks typically accept anything they can quickly sell as security for a loan. This may include real estate, buildings, equipment, inventory or accounts receivable. Personal assets may also be considered, so your home, vehicles and other assets may be used. However, they typically have specific assets in mind to secure the loan. These assets will be listed on your loan paperwork, and you cannot sell, donate or otherwise dispose of them until the loan is paid in full.
In addition, most banks require appraisals of these assets before they will be accepted to secure the loan. A third party must provide the valuation, however. Then, the banker will evaluate the loan-to-value ratio of your assets to determine how much of your assets’ value you can borrow against. For example, if you are purchasing a commercial property, you may be able to borrow up to 60-80% of its total value.
Some loans do not require any assets to secure them. These loans are entirely dependent upon your personal and corporate creditworthiness. Lenders will also look at your business finances to determine its financial health. You need to have adequate cash flow, regular reserves, and low costs to qualify for these types of loans.
The assets of the bank finances are also included as security for the loan. For example, if you are purchasing equipment with the loan, that equipment cannot be sold until it is paid in full, and the bank can repossess in addition to any other asset you used to secure the loan if you default.
Before you sign any loan paperwork, make sure you understand all the assets the bank is using as collateral.