Having valuable business assets which can be used as collateral will always make your loan application more appealing to a lender, but the question is whether or not collateral is a hard requirement on most business loans. Generally speaking, most traditional lenders such as banks will make it a requirement for you to provide some kind of real estate or business equipment which can be used as collateral.
Banks simply can’t afford to have applicants default on their loans because that would put the banks out of business, so they try to protect themselves by having worthwhile assets to go after in the event of a default. What about other lending institutions though?
The SBA and Collateral
Whenever a small business has worthwhile assets which can be used, the Small Business Administration does require that collateral be provided when extending a loan to an applicant. However, it’s also true that the SBA will not usually decline a loan solely on the basis of inadequate collateral offered by the applicant.
If having no collateral is the only unfavorable factor in the loan application, the SBA will not generally turn down the applicant. For the purposes of providing collateral on one of its loans, the SBA considers usable collateral to be Accounts Receivable, inventory, buildings, and any machinery or equipment used in your business. If you have anything which can be sold to generate cash, that could conceivably provide collateral to the SBA for one of its loans.
Value of Collateral
When you do provide collateral to a lender in support of your loan application, it’s good to be aware that a lender will probably not consider that collateral to have the same value which you associate with it. Lenders will always impose a loan-to-value ratio on any collateral you provide, and this will strictly be at their interpretation. As an example, if you’re offering some kind of real estate as collateral, a lender might affix a value of 70% of its market value, rather than the full appraised figure it might carry.
Does Your Company Need Business Financing?
At some point or other, most small businesses require business financing, and when you find yourself in that situation, we’d like you to contact us. At Proactive Funding Solutions, we try our best to accommodate small business owners who require financing, so that you can meet your business objectives and grow your company.