Does a business loan need collateral, or can it be unsecured?

Collateral is something of value the lender can claim if the loan is not repaid. Whether you must offer any depends on the lender, the loan and the amount. The sources below show the range, and the lender’s own criteria decide your case.

What counts as collateral

BDC says collateral can be a physical asset, such as a vehicle, equipment or building, or other items with concrete value, such as accounts receivable, inventory, intellectual property or the business owner’s personal assets. Ask the lender which of these it would take.

When it can be skipped

For working capital loans, BDC says some institutions do not require collateral if the loan is for a smaller amount. It also says a business that is financially solid may qualify for certain loans without it. And it says that without tangible collateral you will generally be required to sign a personal guarantee to obtain a working capital loan, and that a security may also be required depending on the analysis of your financial situation. Unsecured therefore does not mean no personal exposure. Read the guarantee terms before signing.

What the government-backed program requires

The Canada Small Business Financing Program guidelines say primary security is mandatory, and that a term loan to buy real property or equipment must be secured by a first charge on the assets financed. They say that if a loan finances leasehold improvements, computer software, intangible assets or working capital costs, the lender must take security on other business assets, even if they are already subject to prior charges. The same guidelines say personal assets cannot be used to secure a CSBF loan, though a lender can take an unsecured personal guarantee, with separate rules for a loan that improves personal premises the business runs from. The Regulations carry the rules under headings for security and personal guarantees.

Check with the lender

BDC notes that a banker will have different risk tolerances and criteria for a loan without tangible assets as collateral. Ask which assets would be pledged, whether a guarantee is required, and what happens to both if the business is sold. A buyer funding a purchase should also see why lenders require buyer equity.