What Is Collateral?

Collateral is an asset you pledge to secure a loan. If you default, the lender can seize the collateral to recover their money. Pledging collateral reduces the lender's risk, which can improve your approval odds and lower your interest rate.

Types of Collateral

Real Estate

Commercial property
Investment property
Sometimes personal residence (with SBA loans)
Typically valued at 70-80% of appraised value

Equipment

Heavy machinery
Vehicles
Restaurant equipment
Manufacturing equipment
Typically valued at 50-70% of fair market value

Inventory

Finished goods
Raw materials
Typically valued at 30-50% of cost

Accounts Receivable

Outstanding invoices from creditworthy customers
Typically valued at 70-85% of face value

Cash

Business savings or CDs
Valued at 100%

Investment Accounts

Stocks, bonds, mutual funds
Typically valued at 70-90%

How Collateral Is Valued

Lenders don't use the full value of your collateral. They apply a discount (also called a "haircut") based on how easily they could sell the asset if you defaulted:

Cash: 100%
Investments: 70-90%
Real estate: 70-80%
Equipment: 50-70%
Inventory: 30-50%

Personal Guarantees

Even with collateral, most lenders will require a personal guarantee from business owners (20%+ stake). This means you're personally on the hook if the business can't repay.

Should You Pledge Collateral?

If you have collateral available, it generally improves your loan terms. But consider the risk — if your business fails, you lose the pledged assets.

Use our free Funding Readiness Score to see how your collateral position affects your qualification.

Put This Into Action

Reading is a start. Take the free Funding Readiness Assessment to see exactly where your business stands — and what to fix first.

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Understanding Collateral: What Lenders Will Accept