Collateral You Need For the Loan You Want
Risk is inherent to any type of loan, especially business loans. Collateral is the way lenders lessen the risk of losing money, as it is assets including cash, property, or even future earnings. In order to borrow the amount needed, applicants offer assets valued more than the loan’s worth, and the assets approved as collateral can depend on the loan.
SBA Loans
Inventory, accounts receivable, equipment, and undeveloped land can be used, but most often it is real estate. The business owner may need to include their home in the collateral. Real estate yields the best loan-to-value (LTV) ratio up to 85%, while other assets typically get 20 to 50%.
General Purpose Loans
If the loan is unsecured, collateral may not be needed; however, these loans usually accept most types of collateral. Future earnings have the lowest loan-to-value ratio at 20%, yet cash and negotiable securities yield some of the best ratios (up to 98% and 95%, respectively).
Commercial Real Estate Loans
Here, the property itself serves as collateral, and the LTV ratio depends on the source of the loan. SBA-backed loans offer the best ratio of up to 90%, though bank loans are only a little less at 80%. Hard-money loans usually offer a ratio of 65 to 75% of the property’s ultimate value.
Equipment and Inventory Loans
Like commercial real estate loans, equipment and inventory are their own collateral with these types of loans. The typical ratio is 50 to 60% of the equipment’s value. For inventory loans, the ratio is up to 50%. These rates are low because the loans are low risk.
Accounts Receivable and Invoice Financing
The collateral for these loans is future earnings; this carries more risk because the money may not be collected completely. However, this could be an option for those who have little as hard assets. The LTV can be up to 80%, but it depends on the customer and how creditworthy they are.
Peer-to-Peer (P2P) Loans
These loans differ somewhat from the other loans on this list; P2P loans can offer better terms for applicants who do not have excellent credit, and an applicant can submit a proposal to several social lending groups, increasing the odds of getting approved for a loan. Since the loans are typically unsecured, no collateral is needed.
As there are several loan options for business owners, there are also several options for collateral. What an applicant offers can determine the type of financing best for the project and can help a business grow.
