What is collateral in business finance?

What assets can be used as collateral when securing company borrowing?

Collateral plays a major part in helping companies to access business loans and other forms of borrowing. It’s a broad term that incorporates a range of business balance sheet assets that may be provided to a lender as security.

The collateral put forward can vary in value depending on the amount of money needed by the business and any specific risks posed by a borrower – the industry in which they operate, for example.

So how is collateral used by commercial lenders and why is it so important in helping businesses grow?

Collateral and business finance

When a company provides collateral to a lender, it puts forward one or more of its balance sheet assets as security for a loan. These may be tangible assets, such as machinery and vehicles, or intangible assets that include intellectual property (IP).

If a business defaults on its loan repayments, the lender then has legal recourse to seize the asset and sell it to recover their funding. Essentially, collateral minimises their risk and provides reassurance to commercial lenders that they won’t lose their money.

Different forms of collateral

Assets, such as plant and machinery, property, equipment, and vehicles, are commonly used to secure commercial loans and other forms of financing. Accounts receivable and inventory can also offer lenders valuable security that allows companies to obtain the funding they need.

It’s not only physical assets that are relevant in this situation, however. Trademarks, patents, and copyrights are valuable non-physical assets whose value can be leveraged for the company’s benefit – a particularly useful option for businesses with few hard assets.

Importance of collateral in commercial finance

Assets provided to lenders as security play a vital role in the area of commercial financing. They ‘oil the wheels’ of business growth by reducing a lender’s risk and widening access to finance, and may benefit businesses in the following ways.

Larger loan amounts

The reduced risk for lenders when collateral is provided typically encourages them to offer larger loan amounts, particularly where high-value business assets are used, such as property or machinery.

Access to borrowing for newer businesses and start-ups

Having an existing asset to put forward as security can improve access to funding in general for start-ups and newer businesses. Some young businesses find their lack of trading history is a stumbling block to financing.

Better lending terms

The fact that collateral lowers a lender’s risk means they’re more likely to offer favourable terms, such as lower interest rates and longer loan repayment schedules. These can reduce the overall cost of borrowing and keep a business’s cash flow stable.

How to use collateral in business finance

When considering collateral for a commercial loan, it’s important to understand the implications and benefits for your business. Our team at UK Business Finance can provide further information on whether using your business assets as security is the best option for you, and if so, we’ll find you the best deals. Please get in touch for more information.