Key Advice Regarding Collateral for Business Loans

Last Updated on October 11, 2017

The exchange of collateral for business loans can be tricky. At National Business Capital, we make it easy with both unsecured and secured business loans. For example, our equipment financing, purchase order financing, and invoice financing (factoring) loans are all secured.

However, the collateral for business loans that we require is actually integrated with the respective funding solutions themselves:

  • Our equipment financing uses the equipment to be purchased as collateral.
  • Our purchase order financing uses the actual purchase order(s) as collateral.
  • Our invoice financing uses actual invoice(s) as collateral.

The reason for this integration is simple: it is clearly beneficial to our customers for us to operate this way, since they do not have to pledge any additional collateral for business loans — such as buildings, vehicles, securities, cash, and so on.  

Key Advice Regarding Collateral for Business Loans

Calculating the Value of Collateral

What’s more, evaluating how much the collateral is worth is fast and straightforward: $100,000 worth of equipment to be purchased is worth $100,000, $50,000 worth of invoices is worth $50,000, and $75,000 worth of purchase orders is worth $75,000. There’s no grey area.

Traditional Lending Tells a Different Story

However, this IS NOT the case with banks, where collateral for business loans is a very different story!

For example, in order to obtain a conventional secured bank loan, a borrower may list their building as collateral and assign it a value of $150,000. This amount may be perfectly legitimate, and it would take all of 30 seconds to find a similar property in the same area and determine the value. Or within a few minutes, a dozen commercial real estate professionals could be asked to assess the value, and they would all come back with the same (or very similar) value.

What’s the problem here? It’s this: borrowers don’t get to choose who evaluates their collateral: banks do. And banks are notorious for under-valuing collateral. Instead of assigning a value of $150,000 to the pledged asset (i.e. the building), they are likely to assign a value of $125,000, $100,000 or maybe even $75,000.

Why do Banks Do This?

It’s simple: it lowers their risk threshold. Frankly, the last thing that banks want to do is take possession of collateral and liquidate it. They aren’t in the repo business. However, if they are obliged to take that drastic action, they want to be 100% sure that they still turn a sizeable profit.

At the same time — and this is even more of an eye-opener for all of the wrong reasons — banks under-value collateral to filter out small business borrowers, but without having to publicly state that they’re much more interested in going upstream and serving large businesses (which is the truth, but doesn’t look great in a press release!). Indeed, it’s much more agreeable for a loan officer to say “hey, if it were up to me I’d love to give you the loan, but the bank wants $500,000 in collateral and all you have is $250,000.”

How We Help with Collateral for Business Loans

When banks make the rules, borrowers have little leverage when it comes to getting funding. That’s the bad news. The good news is that banks aren’t the only option! As noted above, here at National Business Capital we offer secured business loans that use integrated assets as collateral. We also offer a full range of unsecured funding solutions that don’t require collateral for business loans — period!

To learn more about how we can be part of your funding solution and business success story, contact us today or fill out our two-minute application to start the funding process.

National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.

We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!


About the Author, Megan Capobianco

Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.

Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital & Services and the author. Do no rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.