What Kind of Collateral Is Needed for a Small Business Loan?
Owners of small businesses usually face a collateral request when negotiating loans or credit. When a lender takes collateral, the asset pledged becomes the security for the loan. In the event of a default, the lender has the right to possession or liquidation of the collateral as a means of loan repayment. The kind and amount of collateral desired can vary from one lender to another, often affected by loan size, the borrower's credit rating, and nature of the collateral itself.
Other People Are Reading
-
Marketable Securities
-
Securities can be pledged. A business owner who owns any kind of marketable securities such as stocks, bonds, or notes can pledge them as collateral to many lenders.The lender will monitor their market value and advance a modest percentage against them. In the case of paper certificates, a lender may want to physically hold these documents in their vault, along with a transfer power or assignment form already executed. If a lender will agree to advance against marketable securities, this asset's market power can then be tapped without actually liquidating the owner's asset.
Accounts Receivable
-
Invoices can have value. If the borrower regularly issues invoices and allows customers some kind of payment terms, these outstanding unpaid invoices--"accounts receivable" in technical terms--can be a collateral source. Lenders who specialize in asset-based lending, or "ABL", will take an assignment of the receivables as collateral. Lenders who specialize in factoring will buy the invoice outright and give an advance in exchange for the right of collection. Either an ABL lender or a factor will record a security interest in the receivables as protection of their collateral position.
-
Equipment
-
Equipment assets have value. Borrowers whose businesses are asset-intensive can sometimes use equipment as collateral. The lender may require a pre-approval appraisal of the assets before funding. Loans secured by equipment are normally longer term in nature. Depending on the borrowing need, equipment collateral might shape the actual format of the credit. If the needed funds are for acquisition of the equipment itself, a lease transaction might be offered. Certain leases are treated more favorably than loans for tax purposes.
Other Collateral Options
-
Some collateral alternatives exist. Depending on the value of the asset and the lender's approach, some other collateral alternatives exist. For example, some lenders specifically advance against inventories, contracts, royalties or income streams. These lenders tend to specialize in a particular collateral niche, and their interest rates or fees reflect the lender's investment in the technology, staffing or infrastructure required to monitor the collateral.
Negotiating Fair Value
-
Loan negotiation requires determination. When asked to provide collateral, even a startup business owner can politely request fair value for the assets pledged. For example, some lenders may agree to provide a small business loan which appears relatively unmonitored, other than requiring a monthly amortization. A close inspection of the loan documents, however, might reveal that the lender is granted a "blanket lien" against some or all assets of the business. In such a case, the collateral is often viewed as a backup asset reenforcing the borrower's credibility. Over time, however, the value of the collateral might oversecure the loan, but provide no further borrowing opportunity to the owner/borrower. This could happen in the event of a fast growing body of accounts receivable which are securing the fixed, and now reducing original loan amount.
A candid discussion with a prospective lender, and information about the products available from the same lender as the business grows, will provide a more level playing field for loan shopping and consideration.
-
References
- Photo Credit George Marks/Retrofile/Getty Images Jupiterimages/Photos.com/Getty Images Jupiterimages/Comstock/Getty Images Thinkstock Images/Comstock/Getty Images
