Your credit history is solid, your business is thriving, and you have a realistic growth plan. So why does the bank want collateral before they’ll give you a business loan?
Because lenders see small business loans as a risk that isn’t often worth taking without extra added assurance that you will pay them back. And that means coming up with acceptable collateral to secure the loan.
What is collateral?
Collateral needs to be something tangible that can be liquidated easily. It could be your home, other real estate holdings and property, business’ inventory, the contents of a savings account, or business equipment. And sometimes you may be able to secure a loan with the item that you are financing with the loan – for example, if you’re getting a loan to purchase new equipment, you can probably use that equipment as collateral for the loan – assuming the equipment will retain its full value and is easily resalable.
Obviously, your bank account is going to be much more attractive than something like a house that the bank would have to auction off to recoup their funds. It’s important to consider carefully what you can offer as collateral. Losing a home that your family lives in is a much bigger issue than losing investment property.
Why should I secure a business loan with collateral?
The obvious answer is that you probably won’t be able to get the loan without collateral. But there are other reasons too. Among the most important is that a loan which is secured by specific collateral gives you some control over what happens if you can’t pay it back.
Without collateral, you may find yourself in a situation where the bank can decide what to seize to make good on their loss – otherwise known as a general lien. But obviously, you shouldn’t think of collateral as a way to escape your debts. And it’s important to discuss the terms of your loan agreement, with a legal professional before you sign on the dotted line. Loan terms and disclaimers vary, and this article should not be confused with legal advice.
How much collateral is required for a small business bank loan?
Typically your collateral will need to be valued at a higher amount than the sum of money you want to borrow. That’s because it’s unlikely that the lender will be able to get the full value of your collateral when it is liquidated – the collateral’s value may depreciate, or the lender may have to accept a lower price to liquidate it quickly.
Different types of collateral are assigned different valuation as well. So, your $70,000 loan may require $100,000 in real estate collateral. If you’re securing the loan with something like inventory, you’re likely to get only 50% of the actual value of that inventory – so a $50,000 loan would require at least $100,000 in inventory as collateral. These figures assume the business has a good cash flow, and is established with strong financial projections for the next few years. If your business is new, or is struggling financially, you’ll have to provide more collateral. Or find a co-signer who is willing to repay the loan if you cannot do so.
No collateral-needed small business funding
Alternative funding sources provide options for small businesses who don’t qualify for traditional loans, as well as faster access to funds compared to bank loan approval times. And, even if your credit score isn’t great, you will probably be able to access funding even without securing the loan with collateral.
As an example, a merchant cash advance (MCA) enables smaller businesses to access funding quickly. And since MCAs are not loans - they are an advance against a business’s future income - no collateral is needed. The funder provides a lump sum advance on the merchant’s future revenues. The advance is then repaid from a set percentage of the merchant’s actual revenues. For example, if the set percentage is 10%, and the day’s revenues total $5000, then the repayment amount for that day is $500. On another day, when revenues are $1,500, the repayment amount would be $150. Repayments are automatically withdrawn until the advance and any associated fees and interest is paid back.
Typically, merchant cash advances were available to small businesses such as stores or restaurants that were paid primarily by credit or debit card. Funders were paid back directly from payment card receipts. MCAs can now be paid back by remitting the agreed upon percentage from a business bank account through ACH (Automated Clearing House) withdrawals. You no longer need to be a “merchant” to get a merchant cash advance.
How to qualify for small business funding with no collateral
One easy way to get started is by getting pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.
One Park Financial works to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.