Why would two companies with similar revenue receive opposite responses from the same lender?
Nine times out of ten, it comes down to collateral.
Collateral is what a lender clings to if your loan goes south. You can’t get a loan without some safety net—and certainly not the size or rate of loan you want—with no collateral. On that note, federal reserve data confirms 5.7% of applicants who were denied credit said their main reason for denial was weak collateral.
Here’s the good news…
Most business owners are sitting on far more usable collateral than they realise.
What you’ll walk away with:
- Why Lenders Ask For Collateral In The First Place
- The 6 Asset Types That Actually Count
- How Lenders Put A Value On What You Pledge
- What Happens When The Collateral Falls Short
Why Lenders Ask For Collateral In The First Place
A lender’s job isn’t to gamble. It’s price risk.
By offering collateral on a business loan, the loan is no longer solely dependent on future cash flows – if all else fails the bank has an asset it can seize. This one change dramatically affects the likelihood of approval, interest rates and how much money is involved. According to bank reports, collateral is considered on 83% of loans up to $25,000 and on 98% of loans greater than $25,000 up to $3 million.
Spot the pattern? The bigger the request, the harder the collateral question gets.
There’s another layer most owners don’t see coming. When lenders take collateral for the business, they also collateralize the individual operating it. If Johnny Debt scrambles out of town tomorrow and his company crumbles with him, the bank wants protection from that scenario as well. Enter life insurance as non-obvious collateral. Permanent policies have cash value and dividends from “mutual” insurers can be used to accelerate cash value growth. Either way, that provides a lender with a tangible asset to lien. A term life insurance policy works just fine for most SBA secured deals however, since the lender is only concerned with securing a loan balance, not collecting policy dividends or decades of cash value growth.
Both routes work. They just protect different things.
The 6 Asset Types That Actually Count
Assets are not created equal. Collateral is categorized by lenders based on three criteria: ease of valuation, liquidity and stability of value.
Commercial And Personal Real Estate
Real estate sits at the top of the pile and it isn’t close.
Property is simple to value, difficult to conceal and tends to hold value during economic downturns. Buildings, land or the owner’s personal residence can be used as collateral. Banks will lend against 75% to 90% of the value. This is why property can get you the largest loan, the fastest.
The catch? Personal property means personal risk.
Equipment And Machinery
Trucks, ovens, CNC machines, dental chairs, printing presses … if it’s got a serial number and you can sell it, it counts.
Equipment is favored as collateral because it is easy to value and easy to repossess. The problem is that it depreciates. That $100,000 machine may only bring $50,000 at auction four years from now, so lenders discount heavily and prefer newer equipment.
Inventory
Inventory is okay, just don’t expect it to be the star of the show.
Inventory is valued at liquidation value, not what customers pay you. Translation: Steep discounts are applied to all seasonal, perishable, and trend-driven merchandise.
Accounts Receivable
Accounts receivable from good customers are the single most underutilized asset for collateral.
Lenders love receivables because they become cash based on a predictable schedule. Your customer base is more important than the invoice value and anything over 90 days is usually considered total loss.
Cash, Savings And Cash Value Accounts
Cash is the cleanest collateral of all — no appraisal, no argument, no depreciation.
Business savings accounts, CDs and money market accounts can all be pledged collateral and are generally valued near 100%. Cash value inside of a permanent life policy is another option in this bucket, and balances there have been on the rise. For example, Northwestern Mutual anticipates $9.2 billion in dividend payouts in 2026. MassMutual announced it is increasing its dividend interest rate to 6.60% for 2026.
You may be asking yourself why that matters here. Policy dividends accrue quietly over time, and years later that cash value is an asset that can be pledged the business didn’t have to save any other way.
Vehicles And Titled Assets
Company vans, trailers, boats and heavy transport all qualify.
Titles provide clear proof of ownership. This is appealing to lenders. Similar depreciation discount as equipment.
How Lenders Put A Value On What You Pledge
This is the part that surprises people the most.
A lender does not care how much an asset is worth to you. They care how much it could get in a pinch, in a terrible market, from a motivated seller. That amount is known as forced sale value and it is always less than you wish.
Rough lending values look like this:
- Real estate — 75% to 90% of appraised value
- Cash and deposits — 90% to 100%
- New equipment — 50% to 75%
- Accounts receivable — 60% to 80%
- Inventory — 20% to 50%
Compare that to your loan request. Say a business is applying for $400,000. They may offer $300,000 worth of equipment as collateral. But the usable collateral value of that equipment may only be $180,000. So what fills the gap? Property, cash, a second guarantor or a smaller loan.
Do the maths before the bank does it for you.
What Happens When The Collateral Falls Short
Short on assets? It isn’t the dead end most owners assume.
Loans of $25,000 or less don’t require lenders to take collateral. Also, the SBA will not deny a larger application if the collateral doesn’t cover the full balance. If you have strong cash flow, that can take you far.
When collateral is thin, lenders lean on these instead:
- A personal guarantee from every owner holding 20% or more
- A blanket UCC lien across all business assets
- Collateral assignment of a life policy on the key person
- Shorter terms and higher rates to offset the risk
That is the price of light collateral though. You still have access to the funds. It just costs more.
Tying It All Together
Collateral is the lenders’ language. And most businesses already have too much of it.
Walk into the meeting knowing EXACTLY what you have. Don’t leave anything off the list. Asset list EVERYTHING you own. Real property, equipment, receivables, accounts that have cash in them and cash value of insurance policies that have slowly accumulated from dividend payments over the years. Take that number and apply a discount that your lender would apply.
Quick recap:
- Real estate and cash carry the most weight
- Equipment, receivables and inventory get discounted hard
- Life policies cover the key person risk lenders worry about
- Weak collateral means higher rates, not automatic rejection
Show up with the numbers already worked out and the whole conversation changes.
