Home as collateral for business loan

Business loans are often secured with collateral, an asset that the borrower pledges to the lender for the life of the loan. If you default on your loan, the lender can seize that collateral and sell it to repay the loan.

Lenders use collateral to reduce the risk of losing money on the loan. The amount of collateral needed varies based on several factors, including your credit rating, the type of lender and the nature of the collateral. Some lenders will allow or require borrowers to pledge personal assets to secure a business loan.

What is used as collateral for a business loan?

Collateral is an asset that has value — but not all assets can function as collateral, and some forms of collateral are favored over others. The best collateral (from the lender’s viewpoint) is an asset that it can liquidate quickly, meaning the asset can be easily converted into cash. Therefore, cash is favorable as collateral. Securities can also serve as collateral: Treasury bonds, stocks, certificates of deposit (CDs) and corporate bonds can all be used to secure a loan.

Property that can be used for business loan collateral includes real estate, equipment, inventory and vehicles. These are all tangible hard assets that could be owned by the business or the business owner, or have loans against them. However, hard assets may require more work to liquidate, and their value is less certain. In some cases, you’ll need to get an appraisal of your hard asset to verify its value.

Future earnings are another class of collateral, including accounts receivable — invoices that you’ve sent out.

Some business loans require you to pledge personal assets — such as your home or car — in addition to business assets. The Small Business Administration (SBA) may require this if your business doesn’t have enough assets to provide the collateral required.

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Collateral is an asset that a borrower pledges to a lender to secure a loan. Ultimately, it ensures that the lender isn’t the only one that has something to lose. If the borrower defaults on the loan, the lender can seize the collateral to repay the borrowed funds. Collateral can be a physical asset, such as a home, business real estate or equipment; or a non-physical asset, like accounts receivable or cash in the bank.

Collateral requirements vary from lender to lender and depend on the type of loan you want and how much you’d like to borrow.

» MORE: Compare small-business loans

What does a business use for collateral?

There are several different types of collateral that businesses can use to secure a loan, but some types of collateral are more desirable than others. The more stable an asset’s price and the easier it is to liquidate, the more valuable it’s considered. For example, real estate and savings accounts are considered more valuable than equipment that depreciates.

  • Real estate: This is any property or buildings the borrower owns, potentially including their home. However, it’s preferable to consider other forms of collateral before putting personal property on the line. Real estate collateral is typically used for long-term loans.
  • Vehicles: Both personal and work vehicles can be offered as collateral, and if the vehicle was financed with money from the loan, it typically counts toward collateral automatically.
  • Equipment: This includes manufacturing and office equipment. For example, you might be able to use an expensive cash register as collateral after the lender estimates its present and future value and confirms that it’s insured.
  • Inventory: Product-based businesses may be able to count their inventory as collateral, depending on how it’s valued. Inventory financing is another option for small-business owners who need funding to stock their shelves. In this case, they’d use the funding to buy inventory, which would automatically be used as collateral.
  • Accounts receivable: If you default on a loan, lenders may be able to use the money from outstanding invoices to pay it off instead. Depending on your lender’s preference, customers buying your products or services may or may not know their payments are being used as collateral.
  • Savings: When it comes to collateral, it’s hard to compete with cash in the bank. While using savings as collateral could result in a better interest rate, be wary of putting personal savings on the line.
  • Personal guarantee: Usually used in conjunction with another form of collateral, a personal guarantee means the lender can seize a borrower’s personal assets to pay off the loan if the other collateral doesn’t cover the sunk cost.
  • UCC lien: In addition to requiring collateral, lenders often file a Uniform Commercial Code lien in the state where the borrower lives. This document establishes a lender’s legal right to the borrower’s assets or property if the borrower defaults. Lenders can file liens on specific assets, but many file blanket liens, which give them rights to any business assets necessary to recoup the unpaid loan.

Business loan collateral requirements

In general, how much you offer as collateral depends on your lender, your credit score, how much money you’d like to borrow and what types of assets you have. Matching 100% of your target loan amount in collateral could boost your application’s chances of being accepted, though. And while collateral isn’t required for all SBA, bank and online loans, having it will usually get you better interest rates, terms and loan amounts.

SBA loans

Most SBA loans require some type of collateral, but the Small Business Administration typically won’t turn down an application if collateral is the only factor missing and the rest of the application is strong. And if a business owner applies for an SBA 7(a) loan for $25,000 or less, the lender doesn’t have to request any collateral.

For SBA 7(a) loans over $350,000, lenders must acquire as much collateral as possible from the borrower, up to the loan amount. If the borrower’s business assets don’t reach the loan amount, the lender has the right to tap into the borrower’s personal real estate equity as collateral.

All SBA loans also require a personal guarantee from owners with 20% or more equity in the company.

Traditional bank loans

Once the value of your collateral is assessed, some banks will use the loan-to-value ratio to establish how much of the collateral’s value you can borrow against. For example, commercial real estate loan LTV ratios usually range from 65% to 85%. That means the business owner can borrow 65% to 85% of the collateralized real estate value.

Typically, business owners can borrow 60% to 80% of their sellable inventory value.

Online lenders

Online business loans typically have more lenient requirements than traditional loans. Specific collateral may not be required, but a personal guarantee and UCC lien often are. Additionally, access to these loans, which are also usually faster to fund, comes at a price. The application process may be simple, but interest rates are generally much higher than with more traditional loans.

Business loans without collateral

Unsecured loans are available to some businesses, too. These are loans that have no collateral requirements and are based on the creditworthiness of the small business borrower. Lenders typically look at personal and business credit scores, as well as the business’s overall health, time in operation and regular cash reserves.

How much collateral do lenders require?

Loan-to-value (LTV) ratio is a key metric lenders use to decide the collateral they need. LTV is the amount a lender will loan you based on the value of the collateral. For example, a bank might offer an 80% LTV ratio for a business loan if you pledge real estate as collateral. That means it will lend you $80,000 when the property is worth $100,000. The difference between the collateral’s fair market value and the amount of the loan is called the discount, sometimes known as a “haircut” — in this example, the haircut is 20%. Highly liquid assets will have a smaller haircut.

Typically, a borrower should offer collateral that matches the amount they’re requesting. However, some lenders may require the collateral’s value to be higher than the loan amount, to help reduce their risk.

How much collateral you’re required to will depend on “The Five C’s,” which are common indicators of financial health:

  • Credit history
  • Capacity for repayment
  • Capital
  • Collateral
  • Conditions (details like interest rate, loan terms and amount)

Different lenders will approach these factors in their own way. For example, if you aren’t able to meet the collateral criteria but have an otherwise qualified application, the SBA won’t decline your application based on the lack of collateral alone.

Look out for liens

A lien allows lenders to take a defaulting borrower to court. Liens can be either generalized ones that collateralize all assets of the business — known as blanket liens — or only attached to specific assets, such as a building or piece of equipment. Blanket liens are preferred by lenders because multiple assets can be used to satisfy the loan, and these liens might result in better loan terms and rates.

Collateral by type of business loan

The table below summarizes collateral according to the type of business loan.

Loan TypeTypes of CollateralTypical Loan-to-Value Ratio
SBACollateral is often real estate but can include equipment, inventory and accounts receivable. May require the owner to pledge personal assets.Real estate: up to 90%
General purposeMight not require collateral. Otherwise, most types of collateral are acceptable.Higher LTV ratios mean riskier loans for lenders. A common rule of thumb is to aim for 80% or lower.
Commercial real estateThe property being purchased, developed or remodeled.Hard-money loans: 60% to 80%Bank loans: Up to 80%SBA loans: Up to 90%
Equipment financingThe equipment serves as its own collateral.Up to 100%
InventoryThe inventory serves as its own collateral.Up to 50%
Accounts receivable and invoice financingFuture earnings serve as collateral.Up to 80%
Peer-to-peerDoesn’t usually require collateral.N/A

Business collateral FAQs

What can I use as collateral for a business loan? Cash is the most liquid form of collateral, while securities like treasury bonds, stocks, certificates of deposit (CDs) and corporate bonds can also be used. Tangible assets, such as real estate, equipment, inventory and vehicles, are another popular form of collateral. Invoices and accounts receivable can be used as collateral, too.

Is a personal guarantee the same as collateral? A personal guarantee requires business owners to take personal responsibility for their business debt, whereas collateral is an asset used to secure a loan.

Can I get a business loan without collateral? Yes, an unsecured business loan is a business loan without collateral. However, unsecured loans may come with higher rates and more difficult borrower requirements, as they are riskier for lenders to provide.

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