Business Collateral and small business loans

What Collateral Can I Use to Get a Small Business Loan?

  • May 24th, 2016
  • Tyler Heaps

When you approach a small business loan lender for financing, the lender’s first consideration is your ability to pay back the loan. One of the methods they use to ensure repayment is to ask you for some type of collateral.

The lender gains ownership of your collateral if you default on payment, whether you pledge your car, house, or equipment. Since it gives the lender peace of mind, collateral is an important means for people with less than stellar credit to be able to qualify for a small business loan.

Home Equity

Home equity financing can be a good technique to tap into some extra monies for the startup of your business if you own a home and are having difficulty securing a traditional loan. Be warned, however, you most likely will only be able to take out a small portion of the equity that you have accrued on your home because of the strict debt-to-income ratios that most financiers follow.

401k

A 401k can provide a new business owner with startup capital, but these contribution plans have potential tax consequences and major limitations. Most plans allow the contributor to take out a loan at a prime interest rate, plus one or two points. You can also invest monies from an eligible retirement account into a franchise or small business without getting a loan or taking a taxable distribution, through an arrangement called Rollovers for Business Startups.

Commercial Properties

If you wish to buy a property, you can use that very property as collateral. On the other hand, you can borrow against a commercial property you already own to fund other projects. Banks tend to lend less against commercial property since it is considered a less secure investment than residential property. Banks usually lend up to 50 percent of the value of commercial property.

Equipment

small Business Loan EquiptmentGetting a small business equipment loan could be a clever economic move when you need tools and machinery for your venture. You already have a basic indication of how an equipment loan works if you’ve ever had a vehicle loan. You probably won’t have to offer further collateral, since the equipment is used to secure your loan.

Automobiles

You can use your vehicle as collateral if you own it outright. You might have enough equity if you still owe on it, bearing in mind that the total amount owed should be less than its value. Estimate your car’s value using the Kelly Blue Book, and compare this to your payoff amount. Before offering your car as collateral, you should check with your lender to ensure that the terms of the small business loan you’re seeking will allow this.

Accounts Receivable and Purchase Orders

Asset-based loans are a class of liabilities based on receivables and inventory, which are used as collateral. Asset-based lenders will give you a small business loan backed by 100-125 percent of the value of your receivables. The key is to find lenders willing to offer lines of credit to younger companies. Lendio makes this easy by matching businesses to the right type of lender on its platform: www.lendio.com

If your business receives a large purchase order but you don’t have enough money to fulfill it, you can use purchase order financing. This solution allows you to finance production using your purchase order as collateral. Since this type of financing is not a loan in the conventional sense, companies that would not otherwise qualify for a short-term loan can take advantage of it.

Credit Card Transactions and Deposits

Small businesses can also use merchant cash advances, where a company trades a portion of its credit card sales for a lump sum loan. There is no personal guarantee with this type of payment: it applies to your company only, and it will not affect your personal credit score if for some reason you cannot repay the loan. This is a very flexible form of financing but beware, as the interest rates can be very high.

Another fast, simple way to obtain financing is with a revenue-based loan. No collateral is needed and there are no credit requirements because this type of loan is centered solely on the amount of money your company is depositing into its business account every month. Generally, borrowers can have access to funds the same day, regardless of credit: a very appealing option to startup businesses.

Alternative lending has filled an opening left by risk-averse banks. Some companies are too discouraged to even apply to traditional lenders. The alternative lenders have opened prospects for small companies by incorporating technology to make small-business lending cheaper and more efficient. Lendio is doing its part by making the process more transparent and efficient on its web-based platform. If you’re in the market for alternative funding, visit Lendio and check out your options today.

About the Author

  • Tyler Heaps

Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.

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