If you’ve started looking at your options for collateral business loans, chances are you’re trying to learn as much about the loan process as you can. One thing that you will have to consider is how much collateral you need to get a small business loan. The short answer is that the amount of collateral needed varies. Sometimes, no collateral is needed at all. In other cases, it’s difficult to come up with a concrete number.
First of all, it’s essential that you understand that both your personal and business finances are used to determine if the lender is okay with lending you money. They will look at your finances to decide whether you’re eligible for funds as well as whether you are creditworthy as a borrower.
What Are Collateral Business Loans?
Collateral refers to a property or other asset that a borrower can offer in the event of a default on payments for a loan. Essentially, if you fail to make payments on your loan, the lender can seize whatever asset you offered as collateral and then liquidate it to recoup as much of the loan payment as possible. This is true no matter the reason you fail to make payments on your collateral business loans. The claim of a lender to the collateral of the borrower is called ”lien.”
Do You Need Collateral for a Small Business Loan?
Technically, collateral is not needed for a small business loan. However, collateral is certainly required for business loans in which you’re borrowing against an asset directly. Essentially, the collateral that the borrower offers secures the loan. This in turn makes the loan less risky for the lender.
There will be other situations in which a loan isn’t a collateralized loan product. In general, you can picture a traditional bank loan. However, as a borrower, you will need to put up collateral to mitigate the risk of the lender. This is true even if you aren’t borrowing against the loan.
Also, it is important to keep in mind that just because you don’t offer collateral to secure a loan doesn’t mean your personal or business assets are safe from being seized in the event that you default on a loan. However, if you do offer collateral, you will be in control of which of your assets get seized in the event that you default on your loan payments.
If you default on a loan that is unsecured and the lender needs to recoup their losses, it will be at the discretion of the lender and any other legal parties involved to decide which of your assets are seized. This is referred to as a “general lien” for business assets.
For more information about how much collateral is needed for a business loan, don’t hesitate to contact us.