What is Collateral As It Relates to Business Loans
Collateral For Business Loans
For small business owners, getting your hands on a business loan can be tricky. Working and negotiating with lenders can also be difficult without knowing where to start. When it comes to business financing and securing a loan, it is crucial to be aware of collateral and having sufficient funds for repayment.
This article will give you the basics of understanding what collateral is, and how to set yourself up properly for a small business loan.
The Basics of Collateral
Collateral is a term used to describe and help assure lenders that a borrower will repay their loan amount. Collateral is a way for lenders to protect themselves if monthly payments can not be made by a business. Some examples of collateral are cars, real estate, stocks, bonds, and more. With collateral, a borrower typically would sign an agreement allowing a lender to have access to their personal assets in the event that the business/loan defaults.
Before jumping into a loan application, know that there are specific collateral requirements. Some of the basic requirements for collateral loans include having a personal guarantee, going through the underwriting process, and sometimes having a blanket lien (giving the lender the permission to seize your assets).
Pros and Cons of Using Collateral to Secure a Small Business Loan
- Securing a loan with collateral could result in lower interest rates
- Obtaining loan approval with collateral may be easier if you have poor a credit score or credit history
- Using collateral could result in being approved for a higher loan amount
- Using a secured loan could help build your credit score and/or business credit
- The loan application process can take a while due to lenders needing to evaluate the loan-to-value ratio
- If you fail to make loan payments, you could lose your personal assets and business assets
Popular Types of Collateral (Secured business loans)
A benefit of using collateral is that there are plenty of financing options within providing collateral. Some of the most popular (but not all) forms of collateral include:
- Commercial Real Estate: Whether its personal or commercial real estate, this is a common and effective form of collateral due to its high value.
- Accounts Receivable (short-term loans): This can be effective of show your business has consistent cash flow. It can be effective for credit lines, short-term loans, or long term loans.
- Invoice Financing: For obtaining a small business loan, you can use unpaid invoices as collateral for obtaining a small business loan.
- Inventory Financing: If your business or loan defaults, the items listed as inventory can be sold by the lender to recover their loss.
- Equipment Financing: Asset-based equipment financing is a way of gaining more capital via a business loan by using existing equipment or existing collateral.
- Blanket Liens: Gives lenders the right to seize business assets, including any property, collateral, or savings accounts.
Can I Get a Loan Without Collateral? (Unsecured Loan)
If you are looking to fund a startup or maybe even improve an existent business, and don’t have sufficient collateral, there are alternatives. Most loans like the SBA loan(Small Business Administration) require collateral. However, some alternatives could include obtaining lines of credit through credit unions, using online lenders to obtain a personal loan, or applying for a personal credit card. Often times, it is not difficult to obtain a business loan without collateral and get quick approval. However, there are downfalls associated with unsecured business loans such as needing a high credit score, having a co-signer, getting a smaller loan amount, and having higher interest rates.
About Financing Solutions Business Line of Credit
Financing Solutions business line of credit costs nothing to set up, nothing until used and when used, is inexpensive. The credit line requires no collateral and no personal guarantees.
Organizations will set up the line of credit in advance so that if there is ever any cash flow issues, you will have a cash back up plan. The time to set up a credit line is when you don’t need it so that it is ready to be used, just in case.
If you would like to see if your organization would-be approved and for how much, please feel free to fill out the no-obligation, 2-minute line of credit application here.