Collateral is an asset a borrower pledges to a lender to secure a loan. If the borrower defaults, the lender can seize and sell the collateral to recover the unpaid balance. Common examples include real estate, equipment, vehicles, inventory, and accounts receivable.
When a lender requires collateral, the loan is called a secured loan. Collateral lowers the lender's risk, which typically results in better terms — lower rates, higher loan amounts, or longer repayment periods — compared with unsecured financing. The collateral's value is discounted by an 'advance rate' or 'loan-to-value' ratio: a lender will not advance the full appraised value because collateral may depreciate or be difficult to sell quickly. Real estate is frequently used for SBA 7(a) and 504 loans; the SBA's lending guidelines describe collateralization requirements extensively (https://www.sba.gov/document/support-sba-standard-operating-procedures). Equipment, vehicles, and inventory can secure asset-based loans. Receivables secure invoice factoring and [[asset-backed-lending]] facilities. A [[blanket-lien]] (UCC-1 filing) is a common form of collateral arrangement that gives a lender a security interest in all present and future business assets at once rather than a specific asset. [[Personal-guarantee]] arrangements often accompany secured loans for small businesses, extending the collateral pledge to personal assets.
Not always. Unsecured business loans and lines of credit exist, especially for smaller amounts or businesses with strong cash flow and credit. However, larger loans — especially SBA-backed and bank loans — typically require collateral plus a personal guarantee. MCAs and revenue-based financing generally don't require hard collateral but do require a UCC-1 blanket lien on business assets.
Real estate (commercial or personal), equipment, vehicles, inventory, accounts receivable, and cash savings are all accepted collateral types. Lenders discount each asset: real estate might be advanced at 65–80% of appraised value; inventory at 40–60%; receivables at 70–85% of eligible balances.