Whether you’re just starting your business, looking to expand or want to purchase new equipment, you’ll need cash to reach your goals. A business loan can provide that cash, but will you have to pledge collateral? That depends on the type of loan you’re taking out and your creditworthiness.
What is Collateral?
Collateral is a high-value asset used to secure a loan. Essentially, the borrower says, “I promise to pay you back, but if for some reason I don’t, you can take ownership of XYZ to make up for your loss.”
Lending money is risky business. Collateral gives the lender peace of mind. If you default on the loan, they take possession of the asset, sell it, and recoup the money lost in the loan.
It’s a guarantee that the lender will still get paid, even if you stop making payments.
Pledging collateral also shows the lender that you’re serious about paying back the loan. If you default, you lose that asset.
Types of Collateral
Not all assets can be used as collateral, and some forms of collateral are preferred over others. Lenders prefer assets that can be quickly converted to cash.
Examples of collateral for business loans include:
- Cash
- Paper assets, such as certificates of deposit (CDs), Treasury debt, corporate bonds and stocks
- Real property
- Equipment
- Inventory
- Vehicles
Do You Need Collateral for a Business Loan?
Whether you need collateral for a business loan will depend on the type of loan you’re taking out and your creditworthiness. Generally, collateral is not required for short-term loans, lines of credit, credit cards and installment loans of smaller amounts.
Most other business loans will require some form of collateral simply because these loans are larger and have a higher risk. Lenders want to see that you have a vested interest in the business and will use the money appropriately. When you pledge collateral, you also put something at risk.
In some cases, you will be required to pledge personal assets in addition to business assets. This type of requirement is usually found with Small Business Administration (SBA) loans if you don’t have enough personal assets to meet the collateral requirements.
Some businesses can take out unsecured loans with no collateral requirements, which is what we offer at RidgeStone. We simplify the process, so you can get the cash you need without wasting time.
How Much Collateral is Required?
The answer to this question really depends on the type collateral you wish to pledge and the loan-to-value ratio. The loan-to-value ratio is the amount of money a lender will lend based on the collateral’s value.
Loan-to-value ratios can range anywhere from 50% to 98%. Borrowers will never receive 100% of their collateral’s value, so they must put up more than 100% collateral to receive the amount of money they need.
For example, many banks will offer 80% loan-to-value ratio when putting real estate up for collateral. So, if your property is worth $100,000, the bank will give you $80,000. The ratio will be higher for assets that are easy to liquidate, such as paper assets.
When you take out a collateralized loan, or a secured loan, the asset will have a lien attached. A lien gives the lender the right to sue you in court if you default on the loan.
There are two types of liens:
- Blanket: Collateralize all of the company’s assets
- Specific: Attached to certain assets, such as a building or piece of equipment
Banks prefer blanket liens because it gives them multiple assets to liquidate. It’s also a much higher-risk option for the business.
The Bottom Line
Most lenders will require some form of collateral for business loans. If you have a well-established business with a healthy financial history and excellent credit, you may be able to take out an unsecured loan with a bank.
At RidgeStone, we offer business loans with no collateral requirements and no upfront costs. We consider all credit and can help you manage equipment depreciation.
Contact RidgeStone today for help with your business funding needs.
