Do I need collateral to get business funding?
Sterling's answer Often not in the sense of pledging your building, but almost every funder takes some claim on something, whether that's the equipment you buy, your receivables or a personal guarantee. Ask exactly what they're securing before you sign.
Want a straight answer for your business?
See who'll fund meNot always in the traditional sense. Many business products don't ask you to pledge a building or a vehicle, but most still secure themselves on something: the equipment being bought, your business receivables, a blanket claim over business assets, or a personal guarantee from the owner. The useful question isn't "do I need collateral?" but "what exactly are you taking a claim on?"
Collateral by product
| Product | What usually secures it |
|---|---|
| Equipment financing | The equipment itself |
| Merchant cash advance | Your future receivables, often with a UCC-1 filing and a personal guarantee |
| Revenue-based financing | A share of revenue, sometimes a UCC filing |
| Line of credit | Receivables, inventory or a blanket lien, depending on size |
| Term loan | Business assets, sometimes real estate on larger loans |
| SBA 7(a) loan | Depends on loan size, under SBA rules |
How the claim is recorded
Most business funders record their claim with a UCC-1 financing statement, filed with the state. California's Secretary of State describes it as a filing made "to perfect a security interest in named collateral" that "establishes priority in case of debtor default or bankruptcy."
The collateral description can be narrow, a single machine, or wide. UCC Article 9 allows a filing to indicate that it "covers all assets or all personal property". That is a blanket lien. It can make it harder to raise other money, because the next funder sees someone already has first claim.
What the SBA says about collateral
The SBA sets collateral rules by loan size. For 7(a) loans up to $50,000, SBA does not require collateral. For loans from $50,001 to $500,000, lenders follow the collateral policies they use for similar commercial loans, but "a loan is not to be declined solely on the basis of inadequate collateral." Larger standard 7(a) loans are expected to be secured by the assets being bought plus available fixed assets, up to the loan amount.
The personal side
When a business doesn't have enough assets, funders look to the owner. A personal guarantee makes you personally liable if the business doesn't pay. That isn't collateral in the strict sense, but it does the same job: it gives the funder somewhere to go.
Sterling's take: "no collateral" on an advert rarely means "no claim". Read the security section of the contract before the pricing.
How to protect your assets
- Ask whether the funder will file a UCC-1, and whether it covers specific assets or all assets.
- Negotiate a narrower description if you plan to raise other money soon.
- Read the personal guarantee: is it limited to a dollar amount, or unlimited?
- Keep personal assets out of business deals where you can, and never sign over a home without legal advice.
- When the debt is paid, make sure the UCC filing is terminated.
What to do next
If you're buying equipment, equipment financing uses the asset itself as security and leaves your other assets free. If you're considering an SBA loan, ask the lender early what collateral it will take at your loan size.
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Questions owners ask
What is a blanket lien?
A claim over all of the business's assets rather than one named item. Under UCC Article 9, a filing can describe the collateral simply as all assets or all personal property.
Can I get funding with no collateral at all?
Some products are unsecured in the sense that no specific asset is pledged, but they usually still rely on a personal guarantee, a UCC filing on receivables, or both.
Will an SBA lender take my house?
SBA rules let lenders take available assets as collateral, which can include real estate on larger loans. Ask the lender what it requires before you apply.
Does equipment financing need other collateral?
Usually the equipment itself is the security, which is why it can be easier to get than an unsecured loan of the same size.