June 29, 2018 | By Peyton Sawyer
Collateral is defined as something of value that is pledged as security for the repayment of a loan in the event that the loan recipient defaults on their loan agreement. Typically the assets used for collateral are things like real estate or business equipment. There are circumstances where other secure assets may be accepted as collateral for a loan, but that is determined on a case by case basis by the lender. In all cases, these are assets that can easily be liquidated to satisfy a loan in default.
Now that you have a better understanding of what collateral is and the reason lenders require it for a loan, let’s explore what type of lenders require collateral for approval of a small business loan.
A traditional lender is considered to be a loan from a banking institution. When applying for a business loan from this type of lender, you are required to meet a number of requirements, one of which is having collateral. This can be in the form of real estate, equipment, accounts receivable, and in some cases inventory, but that will depend on the bank issuing the loan and their individual policies. In most cases the collateral can consist of either a business asset or a personal asset.
The next requirement when applying for a bank loan is credit. In order to be approved for a bank loan, for business or even personal use, your credit history must be in good standing. If you have a less than satisfactory credit score, your application will be automatically denied.
Last but not least is the time a bank loan can take for approval. If you have a good to excellent credit score that is within the range for loan approval, congratulations, but be aware that the loan process can be timely. It may take weeks or even months before any money is exchanged. If you require immediate funding, a business loan from a traditional lender may not be what you are looking for.
A business loan is a great way for business owners to fund business growth. For each business, the definition of growth will mean something different. You may need extra capital to order inventory, buy new equipment, make important repairs, fund an ad campaign, or even expand your current business. These are all valid reasons to seek financial assistance, but will a traditional lender share your vision and be willing to fund it? In their eyes, will you be a good candidate?
Many business owners are intimidated by the small business loan approval process, and for good reason. Banking institutions have higher standards than ever for loan approvals. They are only interested in what you look like on paper, not the reasons behind why you may have struggled with a few late payments over the years, or may not have the required collateral for a traditional loan. They do not leave much room for error.
If a bank loan is not an option for your business loan, all is not lost. There are alternative funding solutions that are available. You could receive the money you need with the help of a non-traditional lender. They could offer you the business financing you need without the need for spotless credit or collateral to secure the loan. With some lenders, all you need is a merchant account to receive funds. For example, a merchant cash advance is issued based on your past sales and projected future sales. It does not rely on credit or collateral - with this type of loan none of that is necessary. This business loan option is based on your business, not you or your credit history.