Overview
Lenders apply collateral haircuts to account for risk: how quickly an asset could be sold and for how much in a stressed sale. The post-haircut value — not the book or insured value — is what underwriters use to set secured loan limits, loan-to-value (LTV) ratios, and sometimes interest rates. (See SBA guidance on secured lending for small businesses: https://www.sba.gov/.)
How lenders decide haircut percentages
- Asset type and liquidity: Real estate is usually discounted less than inventory or specialized equipment.
- Market volatility: Assets in rapidly changing markets or with short resale windows get larger haircuts.
- Condition and age: Older equipment or obsolete inventory faces deeper discounts.
- Documentation and legal enforceability: Clear titles, recent appraisals, and perfected liens reduce perceived risk.
Example
If you offer equipment listed at $80,000 and a lender applies a 20% haircut, the usable collateral is $64,000. That adjusted value sets the ceiling on the secured portion of the loan; any shortfall may require personal guarantees, additional collateral, or higher pricing.
Typical haircut ranges (illustrative)
| Asset type | Typical haircut range |
|---|---|
| Real estate (owner-occupied) | 10–20% |
| Equipment | 15–30% |
| Inventory | 30–50% |
| Accounts receivable | 20–40% |
(These ranges vary by lender, industry, and market conditions.)
Practical strategies to reduce haircuts and improve approval odds
- Get professional appraisals and up-to-date valuations. Lenders rely on credible, current evidence of value. A recent commercial appraisal or equipment valuation reduces uncertainty.
- Improve documentation and perfect liens. Clear titles and UCC-1 filings make collateral easier to enforce, often lowering haircuts.
- Diversify collateral. Combining real estate, receivables, and equipment spreads risk and can lower the blended haircut.
- Strengthen cash flow and financials. Strong financial statements and predictable revenue can help negotiate better terms or reduce reliance on collateral.
- Consider personal guarantees or subordinate lenders. Adding a guarantee or secondary lender support can bridge the gap when collateral falls short.
- Shop lenders. Community banks, credit unions, and alternative lenders apply haircuts differently; compare offers rather than accepting the first term.
Common borrower mistakes
- Assuming full book value will count toward a loan.
- Offering illiquid or obsolete assets without backup collateral or guarantees.
- Failing to update appraisals before applying for new financing.
Where to learn more (internal resources)
- Read about underwriting criteria and collateral quality at FinHelp: How Underwriters Assess Collateral Quality (https://finhelp.io/glossary/how-underwriters-assess-collateral-quality/).
- If you use inventory, see practical valuation and lender criteria: Using Inventory as Collateral: Pros, Cons, and Lender Criteria (https://finhelp.io/glossary/using-inventory-as-collateral-pros-cons-and-lender-criteria/).
- Explore alternatives when collateral is thin: Collateral Alternatives for Small Business Loans (https://finhelp.io/glossary/collateral-alternatives-for-small-business-loans-from-personal-guarantees-to-equipment-liens-business-loans/).
Authoritative sources
- U.S. Small Business Administration — lending programs and collateral considerations: https://www.sba.gov/.
- Investopedia — collateral definition and lending practice overview: https://www.investopedia.com/terms/c/collateral.asp.
- U.S. Department of the Treasury — analyses of market liquidity and collateral in lending markets: https://home.treasury.gov/.
Professional disclaimer
This article is educational and does not constitute personalized financial or legal advice. For decisions about financing, collateral strategy, or loan negotiations, consult a qualified lender, attorney, or financial advisor familiar with your business circumstances.
