The Right Kind of Collateral to Use

Securing a business loan is all about collateral. Without an asset to back the loan, you’re far more likely to face lower credit limits, higher interest rates or be completely denied a loan. Understand that types of assets that make the best backing for your loan in order to receive a dynamic and competitive business loan.

Value-Based Assets

Your assets need to have value. An asset-backed business loan typically offers a loan that equals a certain percentage of your asset, under 100 percent. That means that you must provide enough collateral to exceed the amount of cash you’re looking to borrow. Whether you choose a large piece of machinery or multiple smaller assets, you need to find value.

Not only that, but the asset needs to be easy to liquidate. Financial institutions generally send an appraiser to determine not only the value of your item, but also how quickly the institution will be able to liquidate the item.

Types of Collateral

There are two types of collateral that a business loan can request. First, many are backed by a specific asset. This makes the process very straightforward. Your lender simply appraises an asset, gives a loan offer, and you can accept or decline. If you can’t make your payments, your lender will then acquire your asset. The other type of loan is a general lien loan. With this format, a particular asset isn’t named. Instead, the lending institution will give you a set loan, and has permission to sieze assets to match a predetermined amount if you are unable to repay your loan.

Both types of asset-backed loans have their pros and cons, so it’s important to shop around and choose the best business loan for your situation. If you decide to choose a specific asset to back your loan, carefully consider the risks associated with that loan. If you’re unable to make payments and your asset is seized, will your business be able to continue to operate efficiently? Balance the need to back your loan with big ticket items, but also have a plan in place if your asset is seized.

The right kind of collateral can help you achieve your business dreams. With a competitive and high-value business loan you’ll be able to enjoy increased working capital. Whether you need a loan to get you through a financial slump or are looking for ways to expand into a new market, choosing the best business loan is a great way to improve your financial situation. Give us a call to discuss your options today.

SHARE IT: LinkedIn