Business Loan Collateral: What Is It, Do I Need It?
If you are considering getting a secured business loan, you are probably thinking about the processes involved and how you can qualify for the loan. That is not enough, you need to think about the collateral needed to secure the loan. A lender can ask you to use a tangible or an intangible asset as collateral.
Why Lenders Ask For Collateral
When a lender offers you funding to grow your business, they will assume financial risk. To lower this risk, they may request collateral, which they will claim if you stop paying your loan. The lender will liquidate the asset used as collateral to get their money back. If the lender is not satisfied with what they get after liquidating your asset, they may request additional assets.
Why Should You Secure Your Business Loan With Collateral?
Securing your business loan with collateral will increase your creditworthiness. It will provide the lender with a tangible asset to back the loan. As a result, you will receive a higher amount of money than you would if you did not offer the collateral. You will also be given more time to repay your loan, and the interest rates you will be charged are likely to be lower than an unsecured business loan.
You are likely not to get a loan from most lenders if your credit history is not good. However, when you offer sufficient collateral to a lender, your chances of getting good financing options will increase. You will qualify for loans that you would not qualify for if the collateral was not present.
How Much Collateral Do Lenders Need
The amount of collateral that a lender will need will depend on the kind of business loan you are seeking and the lender’s requirements. Your credit history will also play a part in determining this. However, if you borrow a standard business loan 7(a) that is more than $350,000, your creditor will try to obtain as much collateral as they can. On the flip side, your creditor is likely not to require collateral if your business loan amount is less than $25,000, for this particular program.
The Things That You Can Use As Collateral To Secure A Business Loan
Lenders need assets that they can easily liquidate to act as collateral. Therefore, you can use different assets to secure your loan. Here are a few examples of the things that you can use as collateral.
Although it may seem paradoxical to secure a business loan using cash, you can use your cash savings account as collateral. In such a case, your creditor will liquidate the money in the account if you default paying your loan. Many lenders prefer this option.
Although this may be a risky option for you, creditors term it as a low-risk option. Anyway, they will not need to undergo the stress of selling assets. As a result of this, they offer better terms for cash-secured loans.
You can secure your business loan using your real property: your house, vehicle, or buildings. However, an independent party needs to first appraise the assets to be used as collateral. If you fail to pay the borrowed money, you will lose the appraised assets used as collateral.
Before securing your loan using your real property, you need to think about the risks involved. For instance, before collateralizing your home, think about what will happen if your creditor sells it. Probably, the act will be a big hit to your life and finances.
If you operate an inventory-based business, you can use the inventory to secure your business loan. However, a lender has to check if your inventory is valuable and if they can resell it. In case a lender thinks that your inventory is not resalable or valuable, you will not be able to use it as collateral.
If you borrow a business loan to purchase certain equipment, you can use the equipment as collateral. Such equipment is likely to affect the interest rate of your business loan. For instance, if your creditor thinks that the equipment will not lose value over time, they will likely offer better lending terms and vice versa.
Invoices or Account Receivables
This option may be perfect for you if you do not have enough cash at hand to secure your business loan. Here, the lender will collateralize your outstanding invoices or outstanding accounts receivables. In case you default to pay your business loan, your creditor will collect the balance due on your invoice. This form of financing is typically called factoring.
If you choose this option, your creditor can possess anything that belongs to your business as a way of reclaiming the borrowed money. It is a very risky option since you can lose everything if you fail to pay the loan. Also, any other lender will give you expensive loans if your business already has a blanket lien.
You can use your investments to secure your business loan. However, investments that can be sold and bought in capital markets are the ones needed here. They include corporate bonds, stocks, treasury bonds, and certificates of deposit.
Just as the name suggests, a personal guarantee will allow a lender to seize any of your financial assets if you do not pay your loan. The guarantee can be limited or unlimited. When you offer an unlimited personal guarantee to a lender, the assets that you will obtain with time will be part of the guarantee.
What Is The Best Option When It Comes To Collateral
Before collateralizing any of your assets, exercise discretion. Try to negotiate with your creditor and make them accept what you have at hand. Also, collateralize an asset that you can afford to lose.
You need money to run your business successfully. If you do not have enough money for this, take a secured business loan. You will get better loan terms and high loan amounts. You will also get better financing options even if you have a bad credit history. However, be careful when choosing the assets to collateralize to avoid losing some of your important assets.
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