Table of Contents
Government experts estimate that there are over 30 million small businesses in operation in America.
The majority of these will have required some form of external finance at some point, whether to cover their set up costs or at some other stage in their development.
If you need to secure a loan for your small business, you should know that being able to present suitable collateral will be a great help to any application you make.
Read on as we outline the five tips you need to know when looking for a collateral business loan.
What Is a Collateral Business Loan?
Collateral is any item of value that you offer as security for a loan. Should you fail in your repayments, the lender will be entitled to possession of the collateral.
For instance, when you take out a mortgage, the property acts as collateral.
When you take out a business loan, you may not be purchasing anything which could work as collateral. For example, if you take out a loan to cover general expenses, there will be nothing for a lender to repossess if you fail to make repayments.
The idea of a collateral business loan is that you nominate an asset to stand as collateral. This item won’t necessarily be purchased with the loaned funds but can be repossessed if you miss payments.
This system allows businesses to access credit more easily, as lenders can have greater confidence that they won’t be left with a financial loss.
1. Pick the Right Asset
When looking for a collateral business loan, the foremost consideration is the collateral.
The first consideration when picking an asset for use as collateral is whether you own it outright or not. Assets that you still have a loan out against are treated slightly differently.
If you still owe money in respect of the asset used as collateral, the lender will have to come to a refinancing arrangement with the body to which you owe the money. This added complication may make the asset less attractive as collateral.
2. Know What Your Asset Is Worth
Before applying for any collateral business loans, you need to have an exact valuation on your collateral.
This ensures that you’re not providing excess security on the sum of money you’re borrowing. Posting collateral is a risk from your point of view, and a prudent businessperson never assumes more risk than is absolutely necessary under the circumstances.
If your item was recently purchased, its sale price may be an accurate indication of its value. If not, however, you will need to have it assessed by an expert in the relevant field.
3. Apply to the Right Provider
As in every area of business, it is vital to be selective when deciding who to work with when seeking business finance.
There are good lenders and bad lenders. Unfortunately, the latter is all too common. To get the right financing provider, you need to know what to look for.
Seek out a lender with a good reputation in the industry. While every lender is in business to make money, you want an institution that has a reasonable regard for the welfare of its clients as well.
A hugely important consideration is the urgency of your need for funds.
If you need to get cash now, you’ll want to go to a lender who doesn’t delay in processing applications. Certain providers specialize in loans with a quick turnaround for businesses in urgent need.
4. Choose the Right Loan for Your Needs
There are two main considerations here; the type of loan you apply for, and the amount of money you seek to borrow.
In terms of the first, the type of expense you want to cover will dictate the type of loan you should apply for. Do you need money to fund one large item, or to cover ongoing operational expenses?
If you’re borrowing to fund a single expense, you’ll need a term loan. This is a traditional loan structure whereby you borrow a given amount as a lump sum payment and repay it over time.
If you foresee an ongoing need for credit, you might be better off with a revolving credit facility. This structure allows you to draw funds from a lender on an ongoing basis as you see fit. You also repay these funds on an ongoing basis.
While you may never owe a significant sum at any given time under this system, lenders often still require collateral.
5. Consider the Risks Carefully
There is no enterprise without risk. To succeed in business, you must take chances.
However, clever businesspeople manage their risk carefully. You need to weigh the potential benefits of getting a loan against the potential consequences of not being able to repay that loan.
This is particularly relevant to collateral loans, as you nominate a given asset upon which this risk is to fall. The asset you choose is of vital importance.
Remember, no matter how confident you are of your ability in business or the strength of your ideas, nothing in life is guaranteed. Unexpected events can rattle even stable, established businesses.
For this reason, many business people opt to nominate their car as collateral for a business loan. This is an especially good idea if you have two cars in the family, or if your area has high-quality public transport links.
Securing the Finance You Need for Your Business
No matter where you get it from, you’re going to need to find financing for your small business at some point. If you’re considering your options, a collateral business loan should be one of them.
Did you find this article useful? If so, be sure to have a look at some of our others. We post on a wide range of topics, including business, fashion, and technology.