3 Examples Of Collateral Lenders Request Of Small Business Owners

If you’re a small business owner who has applied for a business loan, you’ve surely been asked about collateral. Collateral offers security to banks so that they can feel safer loaning money to borrowers. If a borrower defaults on the loan, the bank has the ability to take control over the collateral in order to recover the loan amount. In other words, your collateral is what you put at risk if you can’t pay back the money you’ve borrowed.

So what types of collateral do banks request of small business owners? Here are three examples:

1. Real estate.

Your property – whether it’s your home or a commercial facility – will often top the list of requested collateral. For banks, real estate offers a high level of security. As you know, properties tend to significantly appreciate over time. That means that putting your house on the line can make it so that your loan is considered lower-risk. Of course, putting up real estate as collateral can be risky for the borrower. No one wants to lose their house!

According to Mark Fruehm who is the Senior Manager of Underwriting and Credit Risk Management at BDC, the most common example of collateral that people can relate to is a residential mortgage. This is where a bank loans money but takes a mortgage on the home. “The home is the collateral,” explains Fruehm, “Similarly, for business loans, collateral is anything that has value and can be sold in order to recoup what is owing on a loan.”

2. Personal assets.

Even if your home or business is seen as sufficient collateral, a bank may look into other valuables that you own. What else do you have that can help you to prove your trustworthiness? Your personal savings accounts, vehicles or even retirement funds may be seen as satisfactory forms of collateral. Of course, there is a lot of personal risk involved when you put your personal assets on the line for your loan.

3. Inventory.

What does your company offer as products? Raw materials, finished goods or even parts awaiting assembly can often be used as collateral. Banks see your goods as tangible proof of your company’s operational potential. In many cases, inventory is valued based on its turnover rate, market demand and shelf life. Although they may lose value over time, a bank may be able to sell the goods to cover a loan that is in default.

Will Kenton of Investopedia defines this process as inventory financing. “The term inventory financing refers to a short-term loan or a revolving line of credit acquired by a company so it can purchase products to sell at a later date,” he writes, “These products serve as the collateral for the loan. Inventory financing is useful for companies that must pay their suppliers for stock that will be warehoused before being sold to customers.”

Did you know that with Synergy Merchants’ unique merchant cash advance program, you don’t need any collateral in order for you to be approved? Our program enables you to get your hands on the extra working capital your business needs within 24 hours! To learn more, please don’t hesitate to call us at 1-877-718-2026 or email us at info@synergymerchants.com. You can also apply online for a free, no obligation quote!