Published on May 9, 2023
With the economy and changing times, some companies and entrepreneurs are looking at ways to keep the lights on while others are figuring out ways to manage their growth and capitalize on potential opportunities. With all of these situations there might be a need for outside capital. One option is equity, but there could be many situations when that is not preferred and the owners want to go the route of borrowing the money. When borrowing money, banks and other money sources (let's aim for legal ones in this article) in many cases ask for collateral, which is an asset or property that is pledged to secure the loan. This is done, so if the borrower defaults on the money that they borrowed, the lender can seize the collateral to recoup their losses. The lender may not like to do that, but it is a better alternative than just to write off the loan as a loss.
That brings up the question of what can be used as collateral for a loan? What are some of the most common forms of collateral (for other forms not mentioned, please write in the comment section below, things that you have heard used like comic books or baseball cards and let's see the list grow). After some research here is a list of some assets that a borrower might use to secure a loan:
Real Estate: A borrower can use their home or other real estate property as collateral for a loan. This is commonly done for mortgages and home equity loans where the money is then used for a wide range of purchases from personal to business.
Vehicles: Cars, trucks, motorcycles, and other vehicles can be used as collateral for a loan. This is often the case for auto loans. Don’t think that pledging your neighbor's boat will be an acceptable form. There will have to be proof that you are legally able to pledge it.
Jewelry: High-value jewelry such as diamonds, gold, or silver can be used. If you enjoy seeing this, there are some amazing episodes of the TV show Pawn Stars that you might enjoy.
Stocks and Bonds: These financial assets can be used as collateral for a loan, although the value of the stock or bond can fluctuate and affect the loan’s value. If the collateral goes down in value to a certain level, this could result in some real problems as more collateral might be requested or the loan called, but we can go into this detail in another article.
Savings and Checking Accounts: A borrower can pledge their savings or checking account as collateral for a loan.
Equipment: Businesses can use their equipment, such as machinery or computer systems. For machinery, the owner might be surprised at the amount a lender is willing to loan. They might say the equipment is almost brand new but remember the amount loaned vs the value in a quick sale, has to have a large enough margin that the lender thinks they, if needed, in the open market will be able recoup their capital.
Collectibles: Rare or valuable collectible items such as artwork, antiques, or coins can be used as collateral for a loan. This goes back to the tv show Pawn Stars…ok I really enjoy the show.
Life Insurance Policies: A life insurance policy with cash value can be used as collateral for a loan.
Cryptocurrency: Some lenders now accept cryptocurrency, such as Bitcoin, as collateral for a loan.
For more ideas, there are so many great resources such as visiting your local Small Business Development Center, Bank, or having a conversation with other professionals in this field, that you might be really surprised at some of the solutions that one comes up with to help in different situations.
Just keep in mind that even though many types of collateral are possible, ultimately what is used for a loan will depend on the lender's requirements and the borrower's assets. In some cases, the lender may require the borrower to provide multiple forms of collateral to secure the loan. It is also important to note that using collateral to secure a loan carries some risk. If the value of the collateral decreases, the borrower may owe more than the collateral is worth. Also, if the borrower defaults on the loan, they may lose the collateral to the lender and if that collateral was your baseball card collection you might be both emotionally and materially out of luck.
*** The content is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional(s) before entering into any M&A transaction. ***
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Shawn Flynn is a Principal at Global Capital Markets, a premier middle-market investment bank with a global presence. Shawn has expertise in mergers and acquisitions, capital markets, financial restructuring, and secondaries. He speaks Mandarin and is the host of the award-winning Podcast The Silicon Valley Podcast. Connect with him on LinkedIn.
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