Collateral for Business Loans: What Counts and What Does Not

Collateral — assets pledged to secure a loan — is one of the most misunderstood aspects of business lending. Some owners think they need substantial real estate to get any financing. Others assume their service business has nothing to offer.

The reality is more nuanced. Let me explain what collateral actually is, what counts, and when you need it.

What Is Collateral and Why Do Lenders Want It?

Collateral is any asset a lender can claim and sell if you default on your loan. It serves as secondary protection — if your business cash flow fails to cover payments, the lender can recover some or all of their money by seizing and selling the collateral.

The key concept is loan-to-value (LTV) ratio: how much the lender will loan against an asset's value. A lender might loan 80% of a property's value or 50% of equipment value — they build in a cushion because selling seized assets often yields less than market value.

Types of Collateral Lenders Accept

Not all assets are created equal in lenders' eyes. Here is how they typically value different collateral types:

Understanding Blanket Liens

A blanket lien (also called a general lien or UCC blanket lien) is a security interest in all of your business assets — not just specific items. When you sign a blanket lien, the lender can claim:

• All equipment and machinery
• All inventory
• All accounts receivable
• All cash in business accounts
• All intellectual property
• All future assets acquired by the business

Most business loans include a blanket lien, even if they do not require specific hard assets as collateral. This is standard practice.

What Is a UCC Filing?

A UCC-1 filing (Uniform Commercial Code) is the legal document that publicly records a lender's security interest in your assets. Here is what you need to know:

• Public record — Anyone can search UCC filings to see what liens exist on a business
• Priority matters — First to file typically has first claim in default
• Duration — UCC filings last 5 years and can be renewed
• Shows on your record — Future lenders will see existing UCC filings

When you apply for new financing, lenders conduct a UCC search to see what existing liens are in place. Multiple existing liens can complicate new financing because the new lender would be in a subordinate position.

Collateral Requirements by Loan Type

Different financing products have different collateral expectations:

The SBA Collateral Policy

SBA loans have specific collateral requirements worth understanding:

• Lenders must collateralize SBA loans to the maximum extent possible
• Loans over $25,000 require collateral — but lack of collateral alone is not grounds for denial
• Real estate equity may be required — if you have business or personal real estate with significant equity
• Personal guarantees are always required — from owners with 20%+ stake
• Collateral shortfall is OK — the SBA guarantee helps compensate for insufficient collateral

The key point: SBA loans are not denied solely for lack of collateral. If your cash flow supports the loan and you have good credit, collateral shortfall is manageable. However, available collateral must be pledged.

What If You Do Not Have Hard Assets?

Many service businesses — consulting firms, agencies, software companies — have few hard assets. Here are your options:

• Cash flow-focused lenders — Many online lenders emphasize revenue and cash flow over hard assets
• Unsecured lines of credit — Available for businesses with strong credit and financials
• Revenue-based financing — Based on future revenue, not assets
• Personal assets as collateral — Home equity, investment accounts, personal property
• Accounts receivable financing — If you have B2B receivables
• SBA loans with personal guarantee — The SBA guarantee reduces lender reliance on collateral

Using Personal Assets as Business Collateral

When business collateral is insufficient, lenders often ask for personal assets. Common requests include:

• Home equity — Second position behind your mortgage
• Investment accounts — Stocks, bonds, mutual funds
• Cash value life insurance — The accumulated value can be assigned
• Personal real estate — Rental properties or land
• Certificates of deposit — Cash pledged in CD form

Pledging personal assets is a significant decision. It means your personal property is at risk if the business cannot repay. Discuss with a financial advisor before pledging personal assets for business debt.

Collateral Valuation: What to Expect

Lenders do not take your word on asset values. Here is how valuation typically works:

Appraisal costs are typically paid by the borrower, either upfront or rolled into closing costs. For SBA loans, appraisals are generally required for real estate over $250,000.

What Happens to Collateral in Default

If you default on a secured loan, here is the typical process:

• Demand letter — Lender demands payment of the defaulted amount
• Cure period — You have an opportunity to catch up (timing varies)
• Acceleration — Lender calls the full balance due
• Repossession or foreclosure — Lender takes possession of collateral
• Sale — Lender sells collateral, often at auction
• Deficiency judgment — If sale does not cover balance, lender may pursue you for the difference (if personal guarantee exists)

The Bottom Line on Collateral

Here is what to remember about collateral in business lending:

• Most business loans require some form of collateral — even if just a blanket lien
• Cash flow is often more important — strong revenue can compensate for weak collateral
• Personal guarantees are standard — your personal assets are at risk regardless of business collateral
• SBA loans are collateral-flexible — lack of collateral alone will not disqualify you
• Existing liens matter — multiple UCC filings complicate new financing

Collateral provides lender security, but it is rarely the deciding factor in business loan approval. Strong cash flow, good credit, and demonstrated ability to repay matter more. Think of collateral as one piece of a complete application picture, not the whole story.