Quick overview

Lenders use collateral to lower credit risk and improve recovery if a borrower defaults. While real estate is common, many small businesses successfully borrow using other business assets. This article explains the practical collateral types lenders accept, how lenders value them, steps to prepare assets for a loan application, common pitfalls, and how to choose the best option for your business.

Common non‑real‑estate collateral and when they work best

  • Equipment and machinery — Best for manufacturers, contractors, and service firms with tangible, durable assets. Lenders typically consider age, maintenance history, portability, and the secondary market for resale. Equipment loans and leases are structured so that the financed asset itself secures the debt (see our guide to equipment financing for more detail: Equipment Financing 101 for Small Businesses).

  • Inventory — Suited to retailers, wholesalers, and some manufacturers. Inventory financing can be seasonal or ongoing. Lenders want recent inventory reports, turnover rates, and proof of marketability. For seasonal businesses, short‑term inventory loans or lines of credit are common; FinHelp has a practical walkthrough here: Short‑Term Inventory Financing: Options for Retailers.

  • Accounts receivable (invoices) — Works for B2B service firms and contractors with invoices due from creditworthy customers. Receivables can be pledged directly to a bank or sold to a factor; typical advance rates depend on debtor creditworthiness and concentration risk. See our primer on receivables financing: What is Accounts Receivable Financing?.

  • Cash, certificates of deposit (CDs), and marketable securities — Highly liquid and often accepted with high advance rates. Using cash equivalents as collateral may yield the best pricing, but lenders can require control agreements.

  • Personal or corporate guarantees and pledge of ownership interests — A personal guarantee doesn’t create a physical asset, but it increases lender recourse. Pledging ownership equity (stock in the business or a parent company) can be used for closely held companies.

  • Contract rights, purchase orders, and future receivables — Lenders will sometimes use signed contracts or purchase orders as collateral, especially in purchase‑order financing or supply‑chain financing arrangements.

  • Intellectual property and software — Accepted less commonly and only by specialized lenders because valuation is complex and markets for resale are thin.

How lenders value collateral (practical rules of thumb)

Lenders assess liquidity, resale value, and the cost of repossession. Typical considerations:

  • Advance rates: Lenders rarely lend 100% of an asset’s appraised value. Typical ranges (illustrative): equipment 50–80% of wholesale resale value; inventory 20–60% depending on turnover and marketability; accounts receivable 70–90% for prime debtors but much lower if invoices are concentrated or disputed. These ranges vary by lender and asset type.
  • Appraisals and inspections: Lenders often require a third‑party appraisal for equipment above a threshold or will perform a physical inspection.
  • Documentation: Clear titles, maintenance records, serial numbers, and photos improve value. For accounts receivable, lenders review aging reports and customer credit quality.
  • Perfection of lien: Most business collateral is perfected via a UCC‑1 financing statement filed with the state Secretary of State. Tangible assets like vehicles may require title filings. Proper perfection preserves lender priority in bankruptcy or repossession (Uniform Commercial Code guidance).

Steps to prepare collateral before you apply (practical checklist)

  1. Inventory and document: Make a complete list with serial numbers, purchase dates, invoices, and maintenance logs.
  2. Obtain appraisals where needed: For high‑value equipment, a recent third‑party appraisal or broker quote is essential.
  3. Clean titles and registrations: Make sure vehicles and titled equipment show clear title; obtain lien releases for paid‑off items.
  4. Organize receivables: Produce detailed aging reports, customer purchase orders, and collection history. Highlight large, creditworthy customers.
  5. Insure assets: Lenders expect assets to be insured and named as loss payee or “additional insured.”
  6. Understand existing liens: Run a UCC search to find prior liens. Subordination or payoff letters may be needed.
  7. Talk to your accountant or advisor about tax implications — equipment purchases and depreciation rules (including Section 179 and bonus depreciation) affect cash flow and asset bases (see IRS guidance on Section 179) (IRS: https://www.irs.gov/businesses/small-businesses-self-employed/section-179-deduction).

Loan structures and examples (what to expect)

  • Equipment loans and leases: The financed asset typically secures the loan. Lease payments may be treated as operating expenses depending on structure. Equipment lenders price loans based on equipment life and obsolescence risk. Example: A contractor pledges $250,000 of heavy equipment and receives a $150,000 loan (60% advance) with a 5‑year amortization.

  • Inventory loans and lines of credit: Often structured as a revolving secured line with periodic audits and borrowing base calculations tied to inventory value. Example: A retailer with $300,000 of sellable inventory obtains a $120,000 seasonal line (40% borrowing base) with periodic audits during peak season.

  • Accounts receivable financing (factoring or invoice discounting): With recourse factoring, the borrower retains credit risk for nonpayment; non‑recourse factoring shifts that risk to the factor (at a higher fee). Advance rates usually reflect debtor credit quality.

  • Purchase order and supply chain financing: Lenders or specialized funders pay suppliers or advance funds against confirmed purchase orders to fulfill large contracts.

Note: SBA‑guaranteed loans commonly require available collateral where practicable; the SBA requires lenders to use collateral the borrower has but does not require perfection of collateral before guarantee — check current SBA SOPs for details (SBA: https://www.sba.gov).

Risks, common mistakes, and how to avoid them

  • Overvaluing assets: Owners often assume replacement cost equals liquidation value. Obtain objective third‑party valuations.
  • Broken documentation: Missing titles, incomplete inventory records, or uninsured assets can stop a deal. Fix documentation early.
  • Lien priority surprises: A prior UCC filing may block a lender. Run a UCC search and be prepared to negotiate subordination or payoff.
  • Not understanding advance rates and covenants: Borrowing bases can change; ensure you can meet covenants during seasonal troughs.

Choosing the best collateral strategy for your business

  • Start with the most liquid, well‑documented assets. Cash and marketable securities give the best pricing; equipment and accounts receivable are next best in most markets.
  • Combine collateral types to raise the borrowing base. Lenders often prefer a mix — e.g., equipment plus receivables — to diversify recovery risk.
  • Consider cost: Factoring and merchant cash advances can be faster but more expensive than traditional bank loans.
  • Talk to lenders early and get feedback on what they will accept; a lender’s requirements can differ from one institution to the next.

Practical case examples (realistic, anonymized)

  • Manufacturing client: Used $300,000 in well‑maintained production machinery as collateral to secure a $180,000 term loan. A third‑party appraiser and maintenance logs were decisive in the lender’s approval.
  • Seasonal retailer: Secured a $100,000 seasonal line using inventory (40% borrowing base) and a short receivables facility to smooth cash flow during peak months.
  • Consulting firm: Converted unpaid invoices into cash quickly via an invoice factoring arrangement with a 80% advance on prime clients; fees were higher than a bank line, but the firm avoided missed payroll.

When to consider specialized lenders or alternative options

If your assets are unusual (IP, software, or niche machinery), consider specialized lenders or marketplace lenders that focus on those asset classes. Alternative financing (revenue‑based financing, purchase‑order finance, or merchant cash advances) can bridge gaps but often at higher cost.

Regulatory and tax notes

Action plan: Preparing to use non‑real‑estate collateral

  1. List and document assets with photos and invoices. 2. Order appraisals for high‑value equipment. 3. Run a UCC search for prior liens. 4. Talk to two or three lenders about acceptable collateral and typical advance rates. 5. Ensure insurance and title paperwork are in order. 6. Review financing offers carefully for covenants, advance rates, and hidden fees.

Final notes and professional disclaimer

Using non‑real‑estate collateral expands financing options for many small businesses, often at acceptable cost and with faster timelines than waiting to acquire property. In my work with over 500 business owners, the businesses that prepared documentation and engaged specialized appraisers consistently obtained better terms.

This article is educational and does not replace personalized financial, legal, or tax advice. For decisions tailored to your business, consult a certified financial advisor, tax professional, or an attorney. Authoritative resources referenced include the U.S. Small Business Administration (SBA: https://www.sba.gov), the Internal Revenue Service (IRS: https://www.irs.gov), and the Consumer Financial Protection Bureau (CFPB: https://www.consumerfinance.gov).