Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Aug 3, 2012

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Business loans can be given for as low as a few thousand dollars to as high as several hundred dollars. However, the amount of money isn’t the issue; it’s whether or not an entrepreneur can convince a lender to lend the amount required. In order to do that, the entrepreneur must entice a lender with appropriate collateral.

If you want to take out a business loan of a certain amount, consider what you have to offer as security for that loan.

Collateral is King

For better or worse, lenders don’t give money to people out of personal benevolence. Lending is a business like any other, and, in order to stay solvent, lenders need security for their money.

With mortgages, homes act as that security. With auto financing, vehicles act as that security. But with business loans, the item being purchased isn’t always a material item or as obvious as the aforementioned examples. Consequently, entrepreneurs must sometimes get creative.

Appropriate forms of collateral for business loans are personal real estate, personal savings, or even existing business assets.

Real estate is perhaps the most common form of business loan collateral. Property is usually worth six-figures, it’s accessible, and it’s very easy to liquidate. As a result, lenders are often more than happy to accept real estate in exchange for a hefty-sized company loan.

However, the risk of using property as collateral is extremely high. Entrepreneurs should ask themselves these simple questions before putting their homes on the line:

  • Where will I live if my business fails?
  • Am I prepared to hand over my property if my business doesn’t pan out?
  • Will my family or dependants be alright with leaving our home if my business doesn’t perform?

Following real estate, personal savings acts as a wonderful source of collateral as well. Entrepreneurs with a significant amount of money at their disposal could offer that as a source of security, but that too comes with risk. If default occurs, borrowers must be willing to fork those guaranteed savings over to their lender.

Finally, for those who already have an established company, business assets may be an appropriate source of collateral for a business loan. Depending on the amount of money requested, business assets can range from simple furniture and appliances to business-owned property and stock options.

While putting up collateral for a business loan may be unnerving, it’s a necessary part of pursuing one’s dream to finance and own a company.