A collateral is critically important for availing a secured business loan. If you are looking for an option to fund your business then a loan against collateral is one of the great options. A secured business loan comes with a number of benefits among which the increased chances of approval is the major one. There are a number of assets that can be used as business loan collaterals. Before we go forward and learn more on the business loan collaterals, let us first understand,
What is a Loan Collateral?
A loan collateral is an asset of the loan applicant which is pledged by the applicant to secure the loan. In the case of defaulting the loan, the lender will have the right to seize the collateral.
The Assets that can be Used as Collateral of a Business Loan
A real estate is one of the commonest forms of business loan collateral. One can use any personal property, commercial property or the equities of a property as a security of a business loan. An approval on business loan becomes easy if you secure your loan with a real estate. But one must be aware of the consequence of the worst times when one becomes unable to pay off the loan. Such situations will have a serious effect on your net worth and the situations can be beyond the explanation of words if your collateralised property is the residential property of your family.
The next asset that can be used as collateral is the equipment of your business. However, with equipment as collateral, the loan amount will be lower compared to the loan amount with real estate as collateral. The equipment of your business must be of much value to you and your business but finding a buyer for the same is difficult. Considering the fact, the lender may provide you with a loan which is much lower than the market value of your business equipment.
Your business inventory can be the next asset of yours that can be used as a business loan collateral. If your business is a product based business, this can be a great option for you. Before the lender grants your loan against your inventory, they will send a third-party auditor to value your inventory in person. A business loan against inventory can sometimes not be a successful one as in case of defaulting a loan, it becomes difficult for the lender to sell the collateral.
Your unpaid invoices can be another form of a business loan collateral. The loan against invoices is very simple to understand as well as to practice. While you will be waiting for your outstanding invoices to be paid, you can hand it over to the bank. Bank will give you cash against the invoices. But never to forget the fact that using your unpaid invoices as a loan collateral is actually a loss for the business. First of all, you are to pay different kinds to fees to avail the loan along with the hassles of the lengthy loan processing. Only if you could have waited for some more days till the payment on invoices is done, you would have earned more.
This is the next kind of business loan collateral that can be used by a business loan applicant. This collateral is not a tangible asset. A blanket lien collateralises anything and everything which is the property of that business. In the case of defaulting the loan, the lender will have the right to sue the business and collect the assets which are sometimes specified while some other times not.
A blanket lien is most favourable for the lender as the loan default will never cause a loss for the lender. The lender will have the right to seize every asset that a business owns in order to satisfy its debts. But if you see the same situation from a borrower’s prospect, you will find a lot of risks associated. If it happens that a borrower defaults in a loan which had the blanket lien, he/she will be left with nothing in his business.
The Last Line
Choosing the right collateral for a business loan can be a tough decision as the risk is always high here. Before you finalise any of these, make sure that which of your assets you afford to lose. Along with the same, you are to consider loan amount too. Before you take any decision on your business loan collateral, remember the mantra which says- ‘ Hope for the best & prepare for the worst’