What can be used as security for a business loan?
Secured business loans play an important role in supporting small business owners as they look to operate and grow their businesses.
Secured loans require collateral, providing lenders with an added layer of security. This is different to unsecured loans, which relies on the borrower’s creditworthiness. However, there are different types of collateral accepted for secured business loans.
Real estate
Among the most common forms of collateral accepted for secured business loans is real estate. Whether it's land, buildings, or residential properties, real estate assets offer tangible security for lenders. Property ownership provides reassurance that, in the event of default, lenders can seize and liquidate the asset to recoup their investment, making it a favoured choice for businesses seeking substantial financing.
Equipment
Industries reliant on machinery and specialised tools, such as manufacturing, construction, or transportation, often pledge equipment as collateral for secured loans. Machinery, vehicles, and other operational assets serve as valuable collateral, offering lenders a tangible asset base with a known resale value.
Inventory
Retailers and wholesalers can leverage their inventory as collateral for secured business loans. Whether it's raw materials, finished goods, or future inventory orders, businesses can tap into their stockpile to secure financing for expansion or operational requirements. Inventory-backed loans provide a flexible financing option, aligning with the cyclical nature of businesses reliant on changing inventory levels.
Accounts receivable
Service-based businesses or those with substantial client bases often pledge their accounts receivable as collateral. Outstanding invoices or anticipated receivables serve as a reliable income stream for lenders, mitigating the risk of default. Accounts receivable financing enables businesses to unlock liquidity tied up in unpaid invoices, facilitating cash flow management and operational continuity.
Alternative forms of collateral
Intellectual property
Innovation-driven enterprises with valuable intellectual property assets, including patents, trademarks, or copyrights, can potentially use them as collateral for secured business loans. While less conventional, intellectual property assets represent a unique form of value, providing lenders with additional assurance of loan repayment.
Cash savings or investments
Businesses with substantial cash reserves or investment portfolios can leverage them as collateral. Cash savings offer immediate liquidity, while investments provide long-term value, serving as tangible assets to support loan applications.
Personal assets
In certain instances, business owners may pledge personal assets, such as personal real estate, investments, or savings, as collateral for business loans. This option is particularly relevant for startups or small businesses with limited business assets, providing an avenue for securing financing.