What is collateral and do I need it?
Collateral is a specific asset that’s used to secure the loan. If you’re unable to make payments and default on your loan, the lender can recoup any losses by seizing the assets used as collateral. That’s why the collateral used is typically based on the total funding amount.
What types of loans require collateral? That depends on many factors, and requirements can vary from lender to lender. For instance some SBA loans may require borrowers to put up available company assets as collateral.1 Similarly, many banks and credit unions also offer secured business funding options that always require collateral.
In other cases, a lender may require collateral on a conditional basis. For instance, the borrower may not meet specific credit requirements or the lender may require collateral for loans over a certain amount.
Finally, some business funding solutions have an inherent collateral requirement. That’s often the case with equipment financing where the equipment itself is used to secure the loan. If the borrower defaults on the loan, then the lender will seize the equipment.
The best way to determine whether or not you need collateral for any type of business funding is to check directly with the lender. They can explain collateral requirements as they relate to a specific type of financing as well as your credit history, current finances, and business needs.
What can I use as collateral for a business loan?
The type of collateral you use to secure business funding depends on a few things, namely the total amount of the loan, the assets available to you, and the lender’s requirements. However, here are a few of the most common types of collateral used by borrowers and accepted by lenders:2
- Real estate
- Unpaid invoices
- Automobile titles
- Stocks, bonds, and other investments
What if I don’t have or don’t want to put up collateral for a business loan?
Though many common business lending options are secured, unsecured business loans, like those through QuickBooks Capital, are also available.
With an unsecured loan, you won’t be required to put up business assets as collateral. Instead, the loan agreement may include a personal guarantee, or a “promise to pay” if the business closes, goes bankrupt, or is unable to repay the loan.3
Like secured funding, the requirements for an unsecured loan will vary from lender to lender and from funding type to funding type. However, many lenders have higher credit score requirements for unsecured funding. If you’d prefer not to use collateral for your business funding needs, you should review your personal and business credit scores before you apply.
Want to learn more about how your credit score impacts funding eligibility, rates, and terms?
Whether or not you need collateral for a business loan depends entirely on the type of loan you get and the lender requirements. There are many business loans that require collateral, but there are also plenty that don’t. As you research your lending options, always check with the lender to find out specific requirements and verify whether the type of funding you’re interested in is secured or unsecured.
You can learn more about QuickBooks Capital’s unsecured business loans here.