Business Loan with Collateral: What Assets Can You Use?

Securing funds for business growth often involves providing lenders with extra assurance. In the case of a secured loan, that assurance takes the form of collateral.

This simply means you need to attach something of value from your business to the loan application. Offering these assets forms a key part of gaining approval and helps demonstrate your commitment to repayment.

This guide will look at the different kinds of property or assets you may use when applying for a business loan with collateral. 

Why Lenders Ask for Collateral on Secured Business Loans

When taking a business loan, collateral is an asset you pledge to the lender as security. If your business struggles to make payments, the lender can take the asset to recover their money.

Risk Protection – It gives the lender a fallback. If your business fails to make repayments, they have a way to reclaim the outstanding balance, which makes lending less risky.

Potentially Lower Interest Rates — Secured business loans with collateral often carry lower interest rates because lenders have protection. This can save your business money and make repayments easier to manage.

Higher Borrowing Power – Offering assets can allow your business to qualify for larger loans. Lenders feel more comfortable lending bigger sums if something valuable is backing the loan. It makes growth plans or new investments more realistic.

Shows Commitment — Offering assets shows that you understand the responsibility of taking a loan and that you plan to repay it. This reassurance adds weight to your application for a business loan with collateral.

What Types of Assets Work for a Business Loan With Collateral?

1. Real Estate 

Commercial real estate is often the most desirable form of collateral for a lender. This includes the business’s physical location, warehouses, office buildings, or even investment properties owned by the business or its principals.

Real estate is tangible, has a clear and established valuation process (appraisal), and tends to hold its value or appreciate over time.

How it works:

• You hand over the property as loan security.
• The lender arranges an appraisal to decide the fair market value.
• You are offered a loan based on a percentage of that value, for example, 70% or 80%.
• The lender takes a right of retention (also known as suretyship) over the property. This is a legal right that is registered against the title deed of the property in the Deeds Office.
• If you fall behind on payments, the lender can initiate foreclosure proceedings to sell the property and recoup the outstanding loan balance.

2. Inventory 

Inventory refers to the goods a business holds for sale, including raw materials, work-in-progress, and finished goods. This is a common form of collateral for businesses in retail, distribution, and manufacturing.

It’s a circulating asset that is constantly being sold and replenished, offering a continuous source of value.

How it works

• A lending limit is agreed upon, based on a percentage of the current value of stock, for example, between fifty and eighty per cent.
• Your business maintains stock possession but gives the lender a legal right over it.
• As goods are sold, part of the sales revenue is automatically directed to the lender to reduce the loan.
• As you purchase new stock, the line of credit replenishes, allowing you to borrow more.
• If you default, the lender can seize and sell the remaining unsold stock to cover the outstanding balance.

3. Rental income 

Where a business owns property that produces rent, future rental payments can serve as security. 

In this case, the value is tied to active lease agreements. The lender looks at the contracts with tenants and bases the advance on the money due in future months. 

How it works

• The lender looks at existing leases and the security of the tenants’ payments.
• An upfront lump sum is provided, usually based on a percentage of the rent expected for the next six to twelve months.
• Tenants are directed to pay rent straight to the lender rather than to the property owner.
• The lender collects rent until the advance, along with their fees and interest, is fully repaid.
• This is a quick way to get cash now, using the predictable cash flow of your rental contracts as security.

4. Cryptocurrency 

Digital assets, such as Bitcoin, Ethereum, and stablecoins, can also be used. This form of security is growing as specialist platforms and local providers create ways for businesses to borrow against crypto holdings. This is known as a crypto asset-backed loan.

How it works

• You transfer the digital assets into a secure account managed by the lender or a trusted third party.
• Because crypto prices can fluctuate dramatically, lenders provide a smaller loan amount relative to the current value. For example, one million rand’s worth of Bitcoin might only support a loan of five hundred thousand rand. 
• If the value of the crypto drops significantly, the lender may request additional crypto as security or partial repayment of the loan to restore the balance. 
• Failure to do so gives the lender the right to sell the digital assets to recover their funds.

5. Invoices 

These are the unpaid invoices owed to your business by your customers for goods or services you have already delivered. These outstanding debts are also known as debtors or accounts receivable. 

How it works

• You sell or assign the invoices to the lender.
• The lender advances most of the invoice value upfront. This type of loan is called invoice factoring.
• They collect the full amount from your customer when the invoice is due.
• After collecting, the lender pays you the balance of the invoice, minus their fees and interest.

6. Equipment and Machinery

Heavy-duty items and specialist tools can also be used, whether it is vehicles on a construction site, large machines in a factory, or appliances in a commercial kitchen. These items are tangible, and many of them have an active resale market, which makes them useful to lenders, especially when the equipment is in high demand.

How it works

• The lender secures the loan by placing a legal right over the identified equipment.
• They usually require an appraisal to decide the current market value.
• The loan is offered at a lower percentage of that value to allow for depreciation and resale costs.
• You usually keep using the equipment, but cannot sell it without permission.
• If you fail to pay, the lender can take the equipment, put it up for auction, and recover the loan amount.

Flexible Funding for Your Business

Lenders such as Geddes take a creative approach when it comes to a business loan with collateral. 

We know every business has its own challenges and opportunities, so we focus on flexibility. We are open to different forms of security, which means businesses can access funds even with less traditional assets.

This makes it easier for businesses to unlock the funding they require to help manage growth, cover unexpected expenses, or explore new opportunities.
Contact us today so we can put together an arrangement that works for you.