by Debi Enders
The purpose of collateral is to assure a lender that you have a second source of repayment should you default on your loan. The first question is: How much collateral do you need? And second: What form should that collateral take?
For most small businesses, the closer your collateral comes to matching the dollar amount of the loan, the better your chances of approval. To qualify for a $25,000 loan, for example, a small business should expect to offer collateral with a value of at least $25,000. To get a preferred interest rate and terms, you’ll need a good credit history, a strong balance sheet and a couple of months in cash reserves as well.
Collateral can take several different forms. If your loan is to be guaranteed by the Small Business Administration, for example, your collateral is usually your home or some other significant asset. Other options include:
• Liquid assets. Cash savings, investments, brokerage accounts and CDs are all viable sources of collateral. Because these assets result in a secured loan, they may help you qualify for a lower interest rate too.
• Your inventory or equipment. Banks accept these items as collateral as well. But be advised: If they are housed in leased space, your landlord will likely be required to sign a “release and consent” form that allows the bank to access the space and remove the collateral should you default on the loan.
Banks tend to look less favorably on using cars and boats as collateral for a business loan. Anything that could “roll or float” away presents a risk.
The bottom line: As you consider what to offer as collateral, consider the risks and the rewards. If you default, your choice could hurt not only your business but your personal life as well.
Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.
Submitted 8 years 357 days ago