What Is Collateral and Do I Really Need it for a Business Loan?

As a small business owner, accessing the right financing is critical to grow — whether expanding operations, purchasing equipment or handling unexpected challenges. If you’ve started exploring your options for business loans, you’ve likely come across the term “collateral” more than a few times. But what is collateral, and do you really need it to secure funding?

This guide will break down everything you need to know about collateral and how it impacts your financing options. Understanding collateral will help you make informed decisions about your business’s financial future.

What is collateral?

Collateral is an asset that you, as a borrower, pledge as security for a loan. It acts as a safety net for the lender, ensuring that if the borrower defaults (fails to repay the loan), the lender can seize the collateral to recover their losses. Essentially, collateral reduces the risk for the lender and increases the chances of approval for the borrower.

With business funding, collateral comes in many forms, depending on the lender’s requirements and the type of loan you’re applying for. Common examples of collateral include real estate, equipment, inventory or accounts receivable. By offering a form of collateral, you reduce the lender’s risk, which can make it easier to qualify for a loan or receive more favorable terms.

Do you need collateral for a small business loan?

The short answer is: it depends. Whether or not you need to offer collateral for a small business loan varies based on several factors, including:

The type of loan. Some secured loans, like traditional business term loans, SBA loans or equipment financing, commonly require collateral. On the other hand, unsecured loans or lines of credit often do not require collateral.

The lender. Banks, credit unions and online lenders have different policies. Traditional banks often require collateral, while alternative non-bank lenders may just require a personal guarantee (especially for lower amounts).

Your business financials. If your business has strong financials, a solid credit history and a proven track record of profitability, you may not need loan collateral. Lenders may be more willing to take on the risk based on your ability to repay.

In general, businesses with little to no credit history, or those with financial challenges, may be required to provide collateral to secure a loan. This may also have the benefit of making loans available with lower interest rates. It’s always worth shopping around and comparing products before the loan application process, to make sure you find the best fit for your business.

When is collateral not required?

Collateral isn’t always mandatory. Some alternative lenders and specific loan types don’t require hard collateral — they may have higher interest rates or shorter repayment terms to offset risk. These include:

Unsecured loans. Approval is based on your credit score and business performance instead of collateral. However, unsecured business loans typically come with higher rates.

Business lines of credit. A business line of credit is a revolving credit line you can draw from as needed. Some may only require a lien on your business assets instead of specific collateral.

Every lender evaluates risk differently, so explore different loan options before assuming collateral is essential.

How much collateral is needed for a business loan?

The amount of collateral required depends on the loan amount, type of business funding and the lender’s policies.

How the value of your collateral is calculated:

Lenders often use a loan-to-value (LTV) ratio, which determines the percentage of the asset’s value they will lend. For instance:

• Equipment financing may offer loans covering 75 – 100% of the equipment’s value.
• Real estate loans often cover 70 – 90% of the commercial property’s value.

For loans with blanket liens (a claim on all of your business assets), the asset quantity and quality across your business may affect how much you can borrow. If you lack sufficient collateral, you might still qualify through a combination of assets or alternative evaluation methods.

Can you get a business loan without collateral?

Yes, it’s possible to get a business loan without providing collateral, though it might be more challenging. Loans that do not require collateral are referred to as unsecured loans. These loans are typically based on your business’s creditworthiness and ability to repay, rather than the value of any assets you pledge. Without collateral, you may face higher interest rates or stricter terms.

To secure a loan without collateral, these factors can help:

Strong credit score. Lenders often offset the lack of collateral by requiring excellent personal and business credit scores.

Personal guarantee. You agree to be personally responsible for loan repayment, giving the lender additional confidence.

Alternative financing options. Many modern lending solutions don’t rely on traditional collateral. For example, invoice financing uses unpaid customer invoices as a type of security. Merchant cash advances take a percentage of sales made through credit cards.

If you don’t want to risk personal or business assets, consider factoring in interest rates, fees and repayment flexibility before opting for unsecured loans.

What can be used as collateral for a business loan?

If collateral is required, you have plenty of options depending on what your business owns and the type of loan. Traditional lenders often prefer assets that are easy to value and liquidate. For example, a piece of commercial real estate might be prioritized over specialty equipment that’s harder to sell. You should consider trying to align the collateral to the loan’s purpose. For instance, if you’re using the loan to pay for equipment, you may want to use the equipment as the collateral.

Here are some examples of common types of collateral:

Real estate. The market value of commercial real estate like office spaces or warehouses can be used as collateral.

Equipment. Machinery, vehicles or tools used for your business operations can be used to obtain secured business loans.

Inventory. Products or materials your business stocks as inventory can be used as collateral — this can be especially useful for retail businesses.

Invoices. Accounts receivable can be pledged as collateral through business financing solutions like invoice factoring. This lets a business sell their outstanding invoices to a company for money upfront.

Savings or investments. Business savings accounts or equity investments might also be accepted.

What is the difference between collateral and a personal guarantee?

While both collateral and personal guarantees provide security to lenders, they work in distinctly different ways.

Collateral

• An asset tied directly to the loan.
• The lender can seize specific assets in case of default.
• Reduces risk for lenders and may strengthen a borrower’s chances of approval.

Personal Guarantee

• Requires the business owner to personally repay the loan if the business defaults.
• Often used for unsecured loans when tangible collateral is unavailable.
• Places personal assets (like personal savings or property) at risk.

Some loans may require both a personal guarantee and collateral, so make sure to understand all terms before signing the dotted line.

The Bottom Line

Whether you’re a startup seeking to scale or an established business pursuing new opportunities, understanding collateral can open the door to better financing decisions. Assess your business assets carefully, explore collateral requirements and understand borrower obligations to decide the best route for your business.