Commercial Bank Loan Collateral: What Counts, What Doesn't

Commercial bank loan collateral is an asset that a business owner pledges to the lender if they are unable to make their loan payments. If the borrower fails to make payments, the bank has the right to seize the asset. Often times, borrowers can negotiate what they must pledge as collateral if they have a solid history with the lender and prove to be a trustworthy and reliable borrower.

What Counts as Collateral

In this day and age, some banks only accept real estate as collateral for a commercial bank loan. There are, however, other tangible assets that banks will accept as collateral if the borrower fails to honor their loan payments. This is called asset-based collateral. Below are several assets that banks accept as collateral, if they deem the asset to have a readily ascertainable value.

  • Real Estate - This is the most common and easily accepted form of collateral. Commercial real estate is a hard asset. There is an established market demand for it, and it generally has a history of long-term appreciation.
  • Equipment - Certain businesses can use equipment to secure financing of their commercial bank loan. Banks will asses the equipment to determine its value; they'll accept it as a form of collateral if they conclude that it has enough value to back your loan.
  • Cash (e.g. a Certificate of Deposit) - Cash is a less-common form of collateral, especially for a commercial bank loan. However, if a business owner does not own commercial real estate or valuable equipment, but they have a CD with enough funds to satisfy their loan, banks will accept it as collateral.
  • Accounts Receivable - Lenders will also accept accounts receivable as collateral, if they conclude that the invoices add up to enough funds to back a defaulted loan.
  • Inventory - Similarly, businesses can use unsold inventory as collateral to secure a commercial bank loan.

What Doesn't Count as Collateral

Banks must protect themselves when issuing commercial bank loans because they are generally worth much money than small, personal loans. To protect themselves, banks accept large assets as collateral, like the ones listed above. Banks will not accept smaller assets, like art or a car, for a commercial bank loan. Although they will consider such smaller assets for personal loan collateral, commercial bank loans pose more risk for the lender and therefore require more valuable assets as collateral.