What are Business Loans with Collateral?
Business Loans with Collateral refers to assets that you are willing to put up to secure business credit, such as a small business loan. Business loans that use tangible assets as collateral are called secured loans (as opposed to unsecured loans). The advantage of a secured business loan is that they often have lower interest rates than unsecured loans, a higher chance of qualification, and more business loan options — which leads to better terms. Collateral or assets are not required for all business financing products.
Sometimes it’s not about getting better terms for a business loan like a better interest rate, but it may be about getting any business loan at all. The assets you use as collateral may be a gateway to approval. To reduce risk, some business lenders will secure assets to help reduce risk. These business lenders then have the ability, upon any default, to seize and sell and use the money raised by selling the assets to repay the business loan. That’s why business lenders love collateral; if the loan goes bad, they can reduce losses from defaults.
What Types of Collateral Is Acceptable for a Business Loan?
As mentioned, when you apply for business financing lender’s look to minimize risk by following a consistent and reliable formula, which always leads to the most important consideration, what is your ability to pay back the business loan. Using assets to back your loan with collateral helps to ensure and influence business owners to repay for fear of losing those assets.
Traditional business lenders have similar definitions regarding what constitutes assets to be used as collateral.
Examples of collateral (Assets) you can use to secure a business loan:
- Business Equipment
- Liquid Assets (Bank account assets, 401k, stocks, mutual funds, investments)
- Residential Property
- Commercial Property
- Accounts Receivables (Invoices)
- Purchase Orders
- Future Sales Receivables
- Blanket on all assets of a business
- Cross Collateralization with other business entities
The 7 Most Common Considerations for a Business Loan with Collateral
Collateral is not “the be-all, end-all” in terms of what will be considered when getting a business loan that requires collateral to pledge as security for the business loan. There are other considerations at play, just like your traditional business loan. Let’s dive into those other considerations.
Personal & Business Credit
Personal credit of the business owner always is the most important evaluator tool in the business credit decision process, even with collateral involved. The history of the business owner’s ability to manage their own personal credit has a direct correlation to how they will manage finances with their business. Business credit is also evaluated for liens, judgments, and State or Federal obligations that may interfere with the business lender’s ability to collect.
Revenue volume consistency, as well as the number of deposits, helps business underwriters determine the risk of the business as well. If you are a business that has volumes that decline or go up and down month to month, that may pose greater risks. The number of deposits and the frequency of business deposits may also pose a greater risk than a business that deposit’s regularly. The monthly minimum amount of revenue required to keep a business open also can present a risk.
As most business owners realize, just because a business has a lot of revenue coming in, it does not tell the full story of whether it is profitable or not. If the business is burdened with too many expenses, it’s going to be hard for a small business to acquire financing, no matter if it’s a million dollars or $15,000 in deposits in revenue, if the expenses out the way the revenue, there’s going to be problems.
Time in Business
The length of time a business is open, the more of a track record can be evaluated, which then can reduce risk. It doesn’t matter if you owned a prior business when it comes to business lending. What matters most is how long you have been operating your current business under current conditions. You don’t get credit for time served from a prior business.
There are many different types of industries that have a unique set of operational challenges. No two industries are created equal, and business lending underwriters recognize that they concentrate on the specific challenges of a specific industry based on experience and performance. Some industries are inherently more risky than others. But through data collection and analysis of the performance of business loans in the same industry as well as delinquency and defaults, business credit underwriters can determine what those high-risk business industries are and set programs and terms that mitigate risk.
Cash Flow (Business Bank Account Activity)
As the old saying goes, “cash flow is king” in business lending. The first place business lenders look at is the most recent business bank statements to gauge cash flow and any stresses in the business compared to prior months. A lot can be gleaned from reviewing the current cash flow compared to the past. Areas that business underwriters look at include consistency of deposits from sales, number of deposits, average daily balances, available cash reserves compared to monthly expenses (debits). These recent bank statement ques tell a lot about the current health of the business and the risk associated with business lending. All too often, business owners make the mistake of waiting until there is a cash flow crunch, and they are operating with thin ledgers or even overdrafts and negative balance days. In many, but not all, cases, it may be too late to get business funding, collateral, or not!
Some business financing products focus on long term financial trends like the prior year’s business tax returns, profit & loss, as well as the prior year’s balance sheet. Lenders compare past performance to current performance by asking for the current month to date profit & loss and balance sheet. Additionally, accounts receivable and payable reports may also be requested to see a full picture that allows business lending underwriters to evaluate the risk of what future projections can be made.
What are the Pros and Cons of a Business Loan With Collateral?
- Access to capital that could be denied by traditional business loan options without collateral.
- Ability to raise more capital with collateral than without
- The ability to get better rates and terms
- Provides more business funding options
- Can lock up and put at risk both personal and/or business assets that aren’t worth risking.
- Exposes you to more liability and loss if you default on a business loan
- Risks personal property, not just business assets if a default were to occur
What Type of Lenders Offer Business Loans With Collateral?
- Traditional banks
- Private Lenders
- Long-Term Business Lenders
- Equipment Financing Companies
- Invoice factoring Companies
- Commercial Real Estate Lenders
- The Small Business Administration (some products require collateral)
- Private Lenders
- Hard Money Business Lenders
What are the typical terms and Product Overview of Business Loans with Collateral?
Rates: Interest rates starting at 4.5% up to Treasury index plus 1% to 2.75%.
Terms: 1 to 5 years can extend to 25 years if highly qualified
Fees: Origination Fees range from 1% to 3%
Payments: Monthly payments
Credit Standards: Must have good credit and deep credit history
Processing Times: At least one week and can be up to a month, depending on bank or product.
Frequently Asked Questions
Do I Need Collateral to get a Business Loan? Can I Get A Business Loan Without Collateral?
You do not need collateral or assets to get a business loan. Having the ability to provide collateral can get you better rates, terms, and ultimately, more options, but it is not a requirement for all business financing products.
How Much Collateral Do Business Lenders Require?
This answer varies widely based on the business financing product you choose and the business lender providing the financing. Some business loans with collateral will require a complete blanket of all personal and business assets. Others will just require business assets or just the equipment you are purchasing. Read terms carefully and ask questions about what is covered for collateral.
Are Business Loans with Collateral difficult to obtain?
It is not difficult to find business funding with collateral. Don’t worry, though; there are plenty of options for help accessing capital.
What types of Business Loans Require Collateral?
- Traditional Bank Business Loans
- Long-Term Business Loans
- (SBA Loans) Small Business Administration Loans (hard assets not required for all SBA programs)
- Commercial Real Estate Loans
- Equipment Financing
- Inventory Financing
Can I qualify for a Business Loan with Collateral if I have bad credit?
Yes, you can get approved for business funding with Collateral with bad credit. Be aware, the rates, costs, and terms will be affected by your credit risk and what can be offered to you.
Can I get a Business Loan with Collateral if I am a start-up business?
The short answer is yes. You can get a start-up business loan with collateral but is limited to SBA Loans and Private business lenders.
Advice, Tips, Warning’s about Business Loans with Collateral
Collateral (assets) are definitely a consideration in reducing the risk of lending to a business. But when pledging your assets as collateral, you must take a step back and make sure that you are aware of the risks of doing that versus the reward of acquiring that business loan that requires certain assets for collateral. Do not jump into this business financing option lightly. Remember, those assets can be repossessed by the business lender if you default on the business financing option. Think long and hard about your decision. We are not saying it is a bad idea. We are saying you just need to know the risks versus the rewards.
In recommending business loan products, just because these products are available doesn’t mean you should take one. Look at all the other options available. Ask yourself the key questions you always must ask when getting a business loan for your business. What is my cost vs. benefit analysis look like? Is the business loan with required collateral worth the risk over the business financing option that does not require collateral? What are the long term benefits of accessing this capital for my business?
If you ask the tough questions of yourself as the business owner and you are comfortable with your answers, then business loans with collateral required may be an excellent source to help your business grow!
How to Apply for a Business Loan with Collateral?
Applying for a loan with AdvancePoint Capital is as simple as a 1, 2, 3, 4 process. Start with this online form, then fill out the short application page, wait a few hours for your approval, and then get your money!
The fast, convenient, and straightforward way to get the money you need for your business – now! Get your Quote Today by filling out our simple form.