Collateral for Small Business Loans—What Is It, and Do You Need It?
When your company requires outside money to pay for its expenses or have a more balanced budget, you can take out a small business loan and keep your company up and running. When you receive the loan amount, you will (most probably) invest it in your business.
What happens if you do not contribute to your company’s profits, and in turn, cannot repay the loan? That is where collateral comes in—lenders use it as protection from unpaying loanees.
In this article, we will explain what can serve as collateral for small business loans and whether you need it in the first place. We will also show you how small business loans work and how to obtain them by making an error-free loan request using DoNotPay.
Small business loans help companies overcome immediate financial shortcomings, such as paying expenses and managing day-to-day cash flow. You can receive a loan for various purposes, such as:
- Buying supplies and equipment
- Financing initial startup costs
- Getting a license
- Covering daily expenditures
While many banks demand you to be in a business for several years, you will be able to find startup loans for newcomers, especially among online lenders.
Regardless of the source, every loan comes with its set of terms. Before you apply, you should take a look at a loan’s repayment schedule and interest rates. Knowing this will help you make a better decision about whether a specific loan fits your business plan or not.
Bear in mind that more lenient loans (i.e., those not asking for a credit score or company age) come with stricter terms and ask for more substantial collateral.
|Loan Type||Description||Interest Rate||Maximum Amount|
|Microloans||Microloans are good for cash-flow management and act as a top-up to your budget. They are relatively easy to get and have a repayment period of six to eight years. Governmental and nonprofit organizations offer microloans||8–13%||$50,000|
|The United States Small Business Administration (SBA) small business loans||SBA loans are the most sought-after because they act as a guarantee for the lender. They will cover the cost if you fail to repay it on your own. The repayment schedule goes up to 25 years||2.75–4.75%||$5 million|
|Credit for a small business||Businesses in need of quick cash flow can apply for credit lines. You can take out credit lines frequently—as long as you repay them on a repayment schedule of up to five years||10–99%||$250,000|
|Equipment loans||You have to use the funds to buy equipment. It usually takes a few weeks for lenders to review an application. Once accepted, you have a deadline set at the end of the equipment lifestyle||2–20%||100% of the equipment cost|
|Merchant cash advance (MCA)||MCAs demand daily repayments and want the full loan repaid in three to 18 months. While the terms are not the best available, MCAs are great for those with a felonious past or low credit score||20–250%||$250,000|
What happens with loans that the SBA does not act as a guarantee for? They can be either:
- Secured small business loans
- Unsecured loans
Secured small business loans demand collateral before the lender submits loan money. A collateral is a business asset that has financial value and that the lender can sell to recoup the money in case you fail to comply with loan terms.
Unsecured loans do not ask for any physical assets but do ask for a higher interest rate.
Collateral can be:
- Treasury bonds
- Real estate
- Future earnings
Your credit score dictates the value of the collateral—the higher the score, the lower the collateral.
When lenders decide on collateral, they use a metric called the loan-to-value (LTV) ratio.
For instance, if you choose a piece of equipment worth $200,000 as your collateral, your LTV ratio can go from 40 to 80 percent, depending on your credit score.
This means that the lender will pay you $80,000–$160,000, and you will still owe them $40,000–$120,000. The difference between the loan value and the actual value is called the discount.
Whether collateral is necessary or not, securing a small business loan is a difficult task. You will need to prove you qualify for the loan by providing in-depth information about the company, as well as various documents, such as financial statements, a business plan, budget sheets, and credit score reports.
If you do not want to worry whether your application is accurate, you can use DoNotPay to guide you through the process. Our app will make sure you submit all the necessary paperwork and provide correct details.
All you need to do is sign up for DoNotPay and:
- Select the Business Loan Request Letter feature
- Gather your personal and business credit scores
- Prepare paperwork to prove your eligibility
- Answer a few questions
- Upload all the necessary paperwork
If you do not know which lender you should choose, you can use our integrated Find Online Business Loan Lender tool and see a list of the best options available to you!
As a business owner, you are bound to deal with various complex processes. Luckily, DoNotPay can help you handle most of those procedures stress-free. Do you need to register your business name as a trademark, file the self-certification request with the Privacy Shield program, or report illegitimate and inappropriate negative reviews? Our app enables you to do it within minutes.
That is not all we can do for you! With our nifty products, you can make the filing of 83(b) election forms a breeze and take care of DMCA agent and Employer Identification Number (EIN) registration in no time.
Need a solution that will facilitate correspondence with your business associates or clients? DoNotPay has the right faxing and mailing product for you!
Drafting legal documents does not have to be complicated or expensive. DoNotPay has a variety of tools that you can use to get a:
- Letter requesting a loan for your small business
- Cease and desist demand regarding your trademark (if someone tries to use your business name, logo, or slogan)
- Formal demand letter requesting a client to pay for your services
- Personalized chargeback rebuttal document based on the:
- Chargeback reason
- Chargeback code
- Service you offer