Collateral Explained: What Lenders Take and Why

What counts as collateral

Lenders accept assets they can value and sell, such as real estate, equipment, vehicles, inventory and receivables.

• Real estate: owned buildings or land
• Equipment and vehicles: machines, trucks, tools
• Inventory: goods held for sale
• Accounts receivable: money customers owe
• Cash and securities: deposit accounts, certificates
• Intangibles: sometimes, such as intellectual property

Lenders look at how easily they could turn the asset into cash, not at what it cost you.

How lenders value what you pledge

Lenders apply a haircut, lending only a percentage of market value to cover costs and price drops.

Illustrative example: you pledge equipment worth $100,000. A lender might lend up to 70 to 80 percent, or $70,000 to $80,000, because a forced sale usually brings less than full value. Real estate may be treated differently from inventory, which can lose value quickly.

Appraisals and documentation are often required, and they take time. See asset-based lending.

Keep records that support the value of what you pledge. Maintenance logs, appraisals, titles and insurance certificates all help a lender take the asset at a higher value. Make sure the collateral is insured and in good repair, since most agreements require you to protect it and let the lender see proof.

Specific liens versus blanket liens

A specific lien covers named assets. A blanket lien covers nearly everything the business owns, now and later.

A lender records its claim with a lien, often through a UCC filing. A blanket lien is broad and can make it hard to get other financing, since new lenders see the existing claim.

Before signing, check exactly what the agreement pledges. Read what is a lien and UCC filings. Cross-collateral clauses can extend a claim further, covered in cross-collateralization.

When a loan is paid off, ask for written proof that the lien has been released, and check that the public filing is cleared. Leftover liens are a common reason a later application is delayed. If a filing stays after payoff, send the lender a written request for a termination.

Also keep a list of every asset already pledged. Before you offer something new as security, confirm it is not already tied to another lender, or the agreement may be breached.

Collateral versus personal guarantee

Collateral is a specific asset you pledge. A personal guarantee makes you personally liable, even if the collateral does not cover the debt.

Learn more in personal guarantee explained.

Secured versus unsecured funding

Secured loans use collateral and usually cost less. Unsecured funding relies on credit and revenue and often costs more.

Secured loans may offer lower rates and larger amounts. Unsecured funding avoids pledging specific assets and can be faster, but pricing is higher. A business with few hard assets, such as a service company, often relies on unsecured or revenue-based products.

See secured vs. unsecured lines of credit and unsecured and secured business loans.

Funding options with and without collateral

Equipment financing uses the equipment itself as collateral. Working capital and revenue-based financing rely mostly on sales and bank activity.

ROI Funder places both kinds. Equipment financing is secured by what you buy. Working capital and revenue-based financing are underwritten mostly on revenue. Terms vary by funder and file.

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. We show true cost, payback period and monthly-equivalent payments before you sign, and there is no obligation to accept an offer.