Collateral are assets that are pledged or offered by businesses and business owners to “secure” a loan. If the loan fails to be repaid or the borrower defaults, the lender can legally repossess and take ownership of the offered collateral and sell it to recuperate their initial loan investment. Lenders almost always require collateral, as their loans are less risky if borrowers pledge collateral. This creates a dynamic where a business has “skin in the game,” and the business, just like the lender, has something to lose if the loan does not work out.
For businesses, the most common types of collateral include business equipment, vehicles, land, real estate (personal and commercial), and cash. Normally, creditors or lenders want small business loans to be fully collateralized, meaning that you need to offer and possess collateral that covers 100% of the requested loan amount. The lender then determines the value of that collateral to make sure it’s greater than or equal to the value of the loan. In most cases, collateral assets must be owned outright by the borrower — there can be no outstanding loans or liens against the assets.
Interested in a DreamSpring loan for your small business? See an overview of all DreamSpring products here.