Collateral

What is collateral?

Collateral is any asset with resale value that you give the lender a legal claim on. If you default, the lender can repossess or foreclose on it, sell it, and apply the proceeds to the debt. If the sale does not cover the balance, you still owe the rest, usually through a personal guarantee.

The claim is recorded with a UCC lien for business assets or a mortgage for real estate. Lenders never lend the full value; they apply an advance rate that reflects how easily the asset sells and how fast it loses value. Our page on unsecured business loans explains what borrowing without collateral costs instead.

How is collateral used?

The lender values the asset, applies an advance rate, and the result is the most it will lend against it.

• You want to buy a machine priced at $300,000.
• The lender applies an 80% advance rate on new equipment, so it will lend up to $240,000.
• You put in $60,000 as a down payment and the machine becomes the collateral.
• If you default two years later and the machine sells for $150,000 but you owe $180,000, you still owe $30,000 plus costs.

On a bank term loan the lender may add up several assets, for example 75% of receivables, 50% of inventory and 60% of used equipment, to reach a collateral value that covers the loan. That sum is what underwriters mean by coverage.

What do lenders consider normal?

Advance rates vary by asset. Typical ranges: commercial real estate 65% to 80% of appraised value, new equipment 70% to 100% of cost, used equipment 50% to 70%, vehicles 70% to 90%, receivables 70% to 90% of eligible invoices, and inventory 20% to 50%. Cash and marketable securities can go to 90% or more.

Banks typically want collateral coverage near or above 100% of the loan. SBA lenders must take available collateral but will not decline solely for a shortfall if cash flow works. Online lenders mostly lend on cash flow and file a blanket lien instead. See asset based lending for loans built entirely on collateral.

What should you watch for?

Watch for cross collateralization. Some agreements let the lender use the same assets to secure any other debt you have with them, so a default on a small line can put your building at risk. Ask for each loan to stand alone.

Watch for personal assets pledged for business debt: SBA lenders will ask for a lien on your home if business collateral falls short, separate from the personal guarantee. Watch for insurance requirements naming the lender. And watch the valuation, because if the lender's appraisal comes in low your loan amount drops with it, so get your own estimate first on real estate and large equipment.

Related terms

Collateral is recorded through a UCC lien, backed by a personal guarantee, and weighed in underwriting alongside DSCR. It matters most on equipment financing and commercial real estate loans, where the asset being bought is the collateral. You can apply here, or ask your AI assistant to list what you can pledge and apply for you through our MCP server.