Using Collateral to Secure a Small-Business Loan

Using Collateral to Secure a Small-Business Loan

Most organizations will at some point need cash to grow. Lenders will scrutinize both you and your business to see if you’re a viable borrower before loaning to you.

Typically what the lender uses to make a credit decision will be, your company’s history, business credit, revenues, balance sheet, and your equity contributions. If you pass a credit check and you operate a healthy business, many banks will also require an additional, and tangible, guarantee that their loan will be repaid, i.e., collateral.

The U.S. Small Business Administration (SBA) defines collateral as “an additional form of security which can be used to assure a lender that you have a second source of loan repayment.” In other words, collateral ensures a lender will either be repaid by you or they can recoup the money in another way, such as liquidating the assets you offer for collateral Collateral can include assets owned by by you personally or your business. Below are some examples of types of collateral to consider using when approaching a bank for a loan:

Accounts Receivable

Automobiles

Business Inventory

Cash Savings

Investment Portfolio

Real Estate

 

Asset-based lending can be a great way to get a fast cash for your business, however there are precautions to take to protect yourself and your business. Below are a few tips on how you can use your assets as collateral, and how you can mitigate the risks associated with defaulting on a loan.

1. Find The True Value of Your Assets

Lenders tend to be conservative about valuing a borrower’s assets for collateral. After all, if the borrower does default, the lender must take the asset, find a buyer, and liquidate it. If you’re not sure what your assets are worth, it could be worthwhile to find an independent appraiser to give you an idea of how the lender will value your property.

2. Your Best Option For Collateral

Essentially, there are two main types of collateral: assets that you fully own and assets that you still have a lien against. If you still have a lien on an asset (e.g., a mortgage for a house), the lender will be able to recoup the loan by refinancing with the lending institution and claiming the title.

A viable asset to use as collateral will have a title of ownership, and lenders will only lend if they can get a title back. Real estate and automobiles are the most common types of collateral, however you can also use pieces of equipment that have a title of ownership.

3. Knowing the Risks

Loss of Assets: Taking a loan using assets as collateral presents the risks of losing the assets if you default on the loan. It’s important to discuss the risks of using certain assets as collateral with a financial advisor, as well as people that could be affected by the loss of that asset. It comes down to being honest with yourself, knowing your situation, and knowing what the funds will be used for. If you really need the money, you might to find alternatives, because you will lose what you’ve leveraged in the unfortunate event of default.

Unsecured Loans: If you choose not to use collateral to secure a business loan, there are also risks in that decision. Lenders can charge higher interest rates for unsecured loans. You need to assess what your company can afford. You can find out about G-Force Funding’s unsecured loan options here: APPLY HERE

4. Understand Terms

Qualified borrowers with good business credit should be able to secure a loan with collateral. Remember, you can gather loan offers from multiple lenders to compare your options.

One thing to consider is the loan-to-value ratio of each offer. This is the percentage of the asset’s value against which the lender is willing to advance funds. Loan-to-value ratios generally range from 50 to 98 percent. The higher the percentage the less collateral you’ll need to put up to cover the value of the loan. For example, if you need a loan for $80,000 and you have an asset valued at $100,000, you ‘d prefer a loan-to-value ratio of 80% over one of 50% as the latter will require you put up additional collateral to cover the full loan value. You can find out about G-Force Funding’s secured loan options here: APPLY HERE