Major banks generally require collateral to limit their risk in making a loan, including Small Business Administration-guaranteed loans (SBA loans). Every lender is unique, but most request valuable real estate or equipment as business loan collateral, and a down payment is also required. Here, we’ll compare traditional bank vs. alternative lender business loans.
Types of Collateral for Bank Loans
For some loans, accounts receivable and product inventory may serve as collateral, instead of, or in addition to, real estate/equipment to secure a bank loan. (The purchase financed by the loan is also assumed to be collateral.) Personal assets may also be used as collateral for a business loan. If the loan goes into default, the lender may resort to selling the collateral item(s) in order to be made whole.
How Banks Determine the Value of Collateral
Banking regulations and SBA rules require that the value of real estate collateral be verified and assessed by certified professional appraisal or 3rd-party valuation. The bank uses this information to decide how much they can lend you, expressed as the loan-to-value ratio. The loan amount could range from 60 to 80% of the item value, depending upon the bank’s policy and the type of collateral you are offering.
Non-Banks: The Quicker, Easier Way to Business Loan Approval
If you don’t have time to wait for appraisals and multi-layered bureaucracy for your loan approval, you might consider alternative lenders. These non-bank lenders may accept a personal guarantee and general lien on your assets as collateral, with no supporting appraisals required. These non-bank lenders also figure the maximum loan amount (loan-to-value ratio) in a more general way than traditional banks.
Instead of formal asset appraisals, alternative lenders often assess the general health and viability of your business, and your credit profile (personal and business), to make decisions about loan approval and amount. This means you could receive a higher loan amount, and quicker approval/funding, from an alternative lender than you might from a traditional bank.
Go against tradition to get your business loan. Contact Grecco Capital to learn about all your business funding options, with or without traditional collateral, today.