Whether you are a limited liability corporation, a sole proprietorship, or a start-up, expanding your company’s potential requires financing. Financial institutions that provide secured loans will look at your balance sheet, revenues, business credit, equity contributions, and company’s history. Even if you operate a healthy and profitable business and pass a credit check, many financial establishments will require guarantees that the business loan will be paid off in full. Different types of collateral can be used to assure the financial institution that there is an alternative source of repayment. In many cases, the collateral is an owner-occupied home (real estate), but you can use equipment, inventory, deposits, and cash savings.
Generally, there are two types of collateral you can offer – assets that the company has a loan against and its own assets. Cars and homes are commonly used as collateral, but you can use pieces of equipment, motorcycles, and watercraft. Asset-based lending is one way to get financing, especially if you have a big purchase order. Bringing on raw materials, equipment, and additional staff is sometimes necessary to meet the requirements of the client. The purchase order can be used as collateral in such cases.
When applying for a secured loan, you may use deposits or cash savings as collateral. Banks accept personal savings because they are a low risk for the financial institution. This applies to financial accounts such as certificates of deposit. The main advantage of using a financial account as collateral is that banks usually offer a low interest rate. The downside is that the financial institution will take possession of your cash savings in case of default.
Businesses that apply for a secured loan should know that financial institutions are conservative when it comes to valuing assets to be used as collateral. In case of default, the bank has to expend resources to seize the asset and try to sell it. Given that banks are conservative, it pays to ask for an appraisal revue that will assess the accuracy of the appraisal. Finally, it is also possible to obtain an unsecured loan, but banks often charge very high interest rates. For more information you can read this useful article.
