Lenders may accept a range of assets as collateral for a loan. Common examples include:
Real estate
This may be commercial real estate, such as offices, warehouses and factories, or it could be residential property such as houses and condominiums. Where there is already an existing lien on the real estate, such as a mortgage, the lender will only consider the remaining equity in the property, taking a second lien on the real estate as subordinated debt.
Example of using real estate with existing mortgage:
- Value of real estate: $1,000,000
- Balance of current mortgage: $400,000
- Equity: $600,000
- Property value for loan collateralization purposes: $600,000
Business equipment
Business equipment can include machinery, heavy plant, production systems, technology and almost anything tangible that businesses use to function. Lenders will always value such assets at fair market value less depreciation – which means wear and tear plus age.
Inventory
For some businesses, the inventory they hold may be their biggest asset and some lenders will consider this as collateral for a loan. Typically, lenders will value the inventory at cost price, not the higher resale price, less a margin for selling the assets quickly at auction.
Investments
Investments can be stocks and share, bonds, treasury bills and other paper assets. These types of collateral are easy to value and liquidate and are considered strong collateral by lenders.
Cash
You may wonder why a business with sufficient cash to secure a loan needs a loan. The answer is that for some businesses, it is better to keep the cash on deposit as a balance sheet asset and take out a loan for other purposes than spending their cash on business expenses. Note that only some lenders will consider cash as collateral, but if the funds are in a bank account or deposit account, they will be easy to value and secure.
Invoices
Invoice financing uses the value of your unpaid invoices as collateral for a loan. You can receive a percentage of the invoice value (up to 95%) within days of raising the bill and then receive any balance (after the lender has deducted interest and fees) when your customers pay the invoice. This loan method means you do not get full value for your invoices, but you get paid in 48 hours or less instead of waiting 30, 60, 90 days or more.
Blanket lien
A blanket lien is what is sounds like – the lender places a lien on all your business assets, giving them access to real estate, vehicles, machinery, cash and inventory to repay the debt. This kind of arrangement is more typical for businesses that have few large assets to secure the loan.