What can be used as security for small business finance?
No matter what type of loan you apply for, lenders or financial providers often require some form of finance security in case you default on repayments. Types of collateral accepted for small business loans range from real estate to machinery and equipment, but can be anything that the lender is able to sell on to minimise their financial loss.
What can be used as collateral for small business loans?
Each financial organisation assesses their clients differently. In general, they'll be looking for assets worth more than the value of the loan to ensure they do make their money back.
Here are six types of small business finance security that banks often consider:
- Property - If you own the premises you work from, you could use it as security because the lender can sell it on if you default on payments. The risk, of course, is jeopardising your family home.
- Machinery and equipment - For many companies, their machinery and equipment is highly specialised and expensive to purchase. This makes it a good option for lenders, as they know they can use it to recoup their losses. Did you know that even company cars can be considered. Some lenders will also consider lending against your existing machinery equipment to enable a business to release some cash from their assets.
- Inventory - Businesses that make money by selling stock can use their products as security. Lenders know they can sell it in the same way that you do, and therefore stand to make back any money they lose.
- Deposits - Banks and lenders don't just look at physical items they can use as security. They'll also consider bank deposits, savings, bonds and other types of deposits.
- Purchase orders or unpaid invoices - Sometimes businesses need a cash injection because they've had a large order come in and need to quickly increase their staffing, materials or machinery to fulfill it. Assuming you've got a hard agreement in place and a range or suppliers, lenders may accept the purchase order or invoice as their security, on the basis they know that money is going to available to them if necessary.
- Personal guarantees - It's possible you could personally guarantee your business loan. In this case, you'd have to repay the loan from your personal finances or with your own assets, should your business default.
Some lenders are more flexible than others, and may look more widely at your general business health and credit history to determine what they're willing to lend. It is possible, occasionally, to get unsecured business loans, if the lender's assessment determines you can definitely meet their repayment schedule.
Getting the right finance for your business is of course an important business decision. Give us a call to find out more.