The six (6) types of collateral for a business loan include:
- Real Estate
- Inventory Financing
- Receivables (Invoice Factoring)
- Personal Guarantee
- Business Lien
Equipment is used as collateral most commonly for industrial or agricultural businesses. The equipment used as collateral can be equipment already owned by the borrower, equipment the borrower is borrowing money to buy or a combination of the two. Highly specialized equipment may have a lower value as collateral, because of the difficulty the lender may have reselling it.
Real Estate is an effective form of collateral as land is a relatively stable and easily evaluated commodity.
A business can use its inventory as collateral for a short-term loan; this is called inventory financing. While the current value of the inventory has a role in its value as collateral, more emphasis is placed on how stable the value of the stock is, how perishable and how easily liquidated it is. Administrative costs of the appraisal of inventory are often much higher because there are so many more factors in assessing the value of inventory, than in other types of collateral.
Receivables (Invoice Factoring)
A business can also use money that is owed to them as collateral for a short-term loan by doing what is called invoice discounting or invoice financing. These collateral value of these invoices are determined primarily by the credit history of the clients who owe money to the borrower.
A personal guarantee is a written promise from a business owner that they will take personal responsibility for paying back the loan if the business fails to. Since it is unsecured, the guaranty is not linked to any specific asset, but the lender does have the right to go after the guarantor’s personal assets if needs are. This is usually an additional requirement on top of other collateral.
A lien is a legal avenue for a lender to seize the assets of a business if they fail to repay a loan. Some liens are limited to one asset or one type of asset. Other liens, sometimes called blanket liens or all-asset liens, have no limit on the assets it can be used on.