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Business Loan Collateral

Learn what can be used as collateral for a business loan from Citizens Bank

A business loan from Citizens Bank can provide the financing you need to help your business grow. Whether you need the funds to improve cash flow, renovate your office space, buy new equipment or purchase additional inventory, we'll help you take the next step toward expanding your company's footprint. Use this guide as an introduction to what you should know about designating assets for business loan collateral during the application process, and speak with a Business Banker to determine which business banking solution is right for your borrowing needs.

What is collateral?

Loan collateral is a form of security offered to a lender as an additional repayment source for financing. You will likely be required to pledge some form of collateral for the life of your business loan or line of credit. However, some smaller loans may be granted on an unsecured basis depending on the lender and amount. Should you find yourself unable to make regular payments or pay off the balance of the loan by the due date, the lender will often work with you to find a solution first, but can eventually sell the collateral to recoup the amount lent to you. Many lenders require tangible assets or property to be used as part of the collateral of the loan, and once the business loan has been paid in full, the lender will relinquish rights to the assets.

What can be used as business collateral?

Generally speaking, a lender will prefer that a borrower use the business's assets to secure a business loan, including the assets purchased using the financing. For example, if you are applying for a small business loan to purchase a new convection oven, refrigerated display case and mixer for your bakery, you may choose to pledge those items as collateral. Additionally, a business savings account, your company's accounts receivable, inventory or other property are assets you could use as business loan collateral. However, a personal savings account or mortgage may also be used as collateral if needed. It's important to note that the business assets and personal assets of all owners of the business will be considered.

How much business loan collateral will I need?

The amount of loan collateral you will be required to pledge will depend on the amount you are borrowing. Depending on the size of the loan, you may be able to choose which business assets you pledge for collateral, such as accounts receivable, inventory or equipment. However, in most cases a lender will take a blanket all business asset lien (ABA lien) to cover the amount of the loan. This means that all personal property of your business would be considered collateral for your business loan. When offering items for collateral, keep in mind that a lender will consider the fair market value of the item and not necessarily the amount you paid for the asset. Should you have trouble repaying the loan, you may be able to negotiate with your lender which assets are called first.

How does business collateral differ for a line of credit or real estate purchase?

Depending on the type of borrowing solution you decide is right for your business, the type of business loan collateral may differ. A small business mortgage will likely use owner-occupied business property as primary collateral instead of an ABA lien, and your loan-to-value ratio (LTV) will be considered just as it would be for a residential mortgage loan. The collateral for a business line of credit will be similar to that of a loan; however, the lender will typically look more closely at your current revenue and assets to determine the right size line that meets your financial situation. Credit worthiness is important for all potential borrowers, so it's a good idea to review your finances and speak with a lender to determine the best option.

Prepare your finances before applying for a business loan or line of credit

When you apply for a business loan or line of credit, a lender will look at your company's credit history and assets, as well as your personal credit score. Before you apply, check your credit history and make changes to any errors or incorrect information if applicable. A bank will usually do its own assessment of the value of your assets, but it's a good idea to make sure your books are balanced and all liabilities are accounted for ahead of time. Additionally, consider having a co-signer lined up if needed. If you have a less-established credit history or don't have the collateral you need to secure a business loan right now, consider financing through the loan guaranty program from the Small Business Administration (SBA)

Speak with a Business Banker for a solution to all your business banking needs

From a business loan or line of credit to a term loan or small business mortgage, Citizens Bank has a banking solution that can help your business grow. Whether you're looking to open a new location or renovate your existing space, hire additional personnel, or offer new products and services, a business loan can make it possible for your company to reach its full potential. If you have questions about what to use for business loan collateral, or if you are ready to apply, contact our Business Bankers today.



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