Do You Need Collateral For A Small Business Loan?

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A business loan is money that is given to you through a lender with the promise of it being paid back, with interest. There are two basic types of loans that you can get, each of them requiring the same basic requirements, except for a few things. Every lending institution will have its own requirements and needs, so check with your bank before you go in to sign paperwork so you have everything that you will need from the start. 

The Basics of Getting a Small Business Loan

The standard considerations that the bank will look at follow the five “C” principal. You need to analyze your own business and see how you would rank with a bank so you can make some adjustments, if needed, to maximize your chance of getting approved for the loan. A recent survey conducted by the Sensis Business Index states that four out of ten small business owners felt that it was harder to get a small business loan, compared to times before covid-19 hit.

  1. Character – The first thing that will be looked out for will be your character. This means how dependable and trustworthy that you are. They will check your credit score, credit history, financial history, and your stability. This check will include your business and personal information so they can better understand who you are, and whether or not you would be a good risk for them.
  2. Collateral – The bank will check to see what type of collateral you have and access the value of it. If the total worth is more than the amount of the loan, they will consider it to be a fair risk to invest in your business with a loan. This will, of course, depend upon whether you pass their other criteria steps.
  3. Capacity – This is where they dig deep into your financial activity. They want to know if you have enough cash flow to cover the amount of the payment to repay the loan. This includes profits from your business and any other income that you have coming in. The reason for this is that since you are the business owner they will want to check into your personal finances, as well as your business ones.
  4. Capital – What are all your business, and personal, assets worth? The bank wants to know that if they needed to liquidate your items to repay the loan if it would cover the loan amount, the interest, and any fees that have been tacked on. You do not want to ever have to get to this point, but the bank will check just to cover their own interests.
  5. Conditions – Once the loan papers are drafted the lender will have a list of conditions that they will want to make sure that you will be able to meet. The repayment schedule, and the amount of the payment, would be two specific aspects of this “C.”

Search business loans on a comparison site and see what other qualifications your lending institution may need. In order for you to fully understand what you need it is suggested that you check around and see what some of them require. This will help you be better prepared when the time comes to complete a loan application.

To answer the question in the title, ‘no,’ you do not need collateral to get a small business loan. You must pass the five “C’s” and you will be required to show proof that you have more than enough cash flow to cover the payments. If the lender feels that you cannot comfortably cover the payment with your profits, they will require some type of collateral to cover the amount that they have loaned to you.