Overview

Nontraditional collateral covers intangible or unconventional assets businesses pledge to secure credit. Examples include customer contracts, subscription revenue streams, exclusive software licenses, patents, trademarks, and structured receivables. These assets are increasingly used by startups and tech firms that may lack traditional collateral such as real estate or large equipment.

In my practice working with small and mid‑sized companies, properly documented and valued nontraditional collateral can materially expand financing options and improve rates—provided the lender is comfortable with the asset’s revenue predictability and legal enforceability.

How lenders value nontraditional collateral

Lenders focus on three practical questions when valuing intangible assets:

  • Will the asset produce predictable cash flow? (e.g., long-term contracts or recurring SaaS subscriptions)
  • Is the right transferable or assignable to a lender/receiver? (look to contract assignment clauses and license terms)
  • How liquid is the asset if the lender must collect or sell it?

Valuation methods include discounted cash flow for recurring revenue, comparable transaction multiples for IP, and expert appraisals for specialty agreements. See our guide on Assessing Collateral: Valuation Methods Lenders Trust for common approaches and lender preferences.

Regulatory and legal frameworks matter: security interests in receivables, contracts and many rights are perfected under UCC Article 9, which affects priority at default (UCC Article 9 overview: https://www.law.cornell.edu/ucc/9). Also consult Small Business Administration and Consumer Financial Protection Bureau guidance on business lending practices (SBA: https://www.sba.gov; CFPB: https://www.consumerfinance.gov).

Documentation and perfection

Lenders will require clear documentation. Typical steps include:

  • Third‑party valuation report or revenue schedules
  • Copies of the underlying contracts or license agreements showing assignment rights
  • A security agreement that describes the collateral
  • Filing a UCC‑1 financing statement when applicable to perfect the lender’s security interest

If the collateral is IP, lenders often ask for an IP schedule detailing registrations, filing dates and territorial scope. For more on listing nonphysical collateral, see our article on IP and Intangible Asset Schedules.

Practical examples

  • Contracts: A construction firm used a multi‑year government contract with predictable draws as collateral to obtain a working capital line. Lenders favored the contract’s payment schedule and the government counterparty.
  • Software licenses / SaaS revenue: A SaaS startup pledged a portfolio of recurring subscriptions and exclusive license rights. The lender used a revenue multiple and a conservative haircut to set advance rates.
  • Receivables & assignment: A distributor assigned its receivables to a lender; the lender filed a UCC‑1 and structured covenants to monitor collections.

For a deeper look at receivables and contracts as collateral, see Nontraditional Business Collateral: Using Receivables and Contracts.

Common lender concerns and how to address them

  • Transferability: Verify that contracts or licenses are assignable and free of anti‑assignment clauses. If required, get consent language from counterparties.
  • Concentration risk: Lenders dislike reliance on one large contract or single customer; diversify collateral or agree to tighter covenants.
  • Valuation volatility: Provide third‑party appraisals and conservative cash‑flow models to reduce perceived risk.

Tips to improve approval odds

  1. Get a professional valuation and create an asset schedule showing revenue history and forecasts.
  2. Clean title: ensure there are no undisclosed liens and file UCC‑1s promptly.
  3. Strengthen documentation—include assignment provisions or lender‑friendly consent where possible.
  4. Pair nontraditional with traditional collateral (cross‑collateralization) to increase advance rates.

Common mistakes to avoid

  • Assuming all intangible assets are easily liquidated—many require lengthy enforcement or transfer processes.
  • Failing to confirm assignment/transfer rights in the contract or license agreement.
  • Using overly optimistic revenue forecasts without back‑tested historicals.

Professional insight

In deals I’ve arranged, lenders typically apply haircuts of 20–70% to projected cash flows from nontraditional collateral, depending on contract length, counterparty credit and transferability. Early engagement with legal counsel to clear assignment and perfection issues often shortens underwriting timelines.

Disclaimer

This article is educational and does not constitute personalized financial or legal advice. Consult a qualified attorney or financial advisor on contract assignment, UCC perfection, and loan structuring for your specific situation.

Authoritative sources