What type of collateral is needed for a small business loan?
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UPDATED: Oct 29, 2012
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Collateral for small business loans can vary based upon the size of the loan but it can range from small equipment to personal homes.
Collateral is an additional layer of security for lenders. In the case that a small business loan is not repaid, it defines assets for the lender to accept as a form of repayment. Depending on the type of business, collateral can be inventory, the company building and any equipment.
One form of business loan is a Small Business Administration (SBA) loan. If an owner applies for an SBA loan greater than $250,000, a certified appraisal will be required. The SBA will require certified appraisals of the business property and larger assets in order to secure the loan. The appraisers will research how the collateral is valued based upon market and local standards. For example, if the collateral is a company building, the appraisers will analyze the price of the building if it would be sold on the current real estate market. This further ensures the lender that their money will be returned to them.
For some applicants, their business assets and personal credit is not strong enough to secure a business loan. For these applicants, the lender may require their home as collateral. Owner-occupied residences can serve as collateral for loans when a borrower’s credit is weak and their home is worth a substantial amount of money. Many lenders feel this is necessary to keep the borrower committed to the success of the business and repayment of the business loan.
There are business borrower’s that do not have substantial collateral, but this does not immediately deny them a loan. Small business loans will usually not be rejected based upon poor collateral alone. If the borrower has a high level of credit, good personal references and a solid business plan, the lack of collateral will be considered alongside the other positive factors.
There are many different lenders and variations of small business loans, so the requirements for each can vary. A borrower should review the requirements for the chosen lender before moving forward with the loan process. Additionally, it is important to think logically about what is offered as collateral. If the loan is defaulted, the lender can come after the borrower’s business, assets, and possibly even their personal finances. While the uses for a small business loan can vary from equipment, inventory, and even payroll, a loan should not be taken out without a plan to repay it back.