Offering Collateral to Obtain a Business Loan

Whether you run a corporation, a sole proprietorship, or are just starting your business, you may need a business loan to increase your company’s potential. However, before lenders approve your application, they will want to see if you are a creditworthy and reliable borrower. Generally, you can choose between an unsecured and secured business loan, and you have to offer collateral with the latter.

Secured business loans require upfront collateral which can be a building, land, and anything else that will reduce the risk for the lending institution. The most commonly used form of collateral is property, but banks also accept deposits, cash savings, inventory, and equipment. Banks are always willing to accept cash as collateral since personal savings reduce the risk they take.

Your bank will be more willing to extend financing and offer better terms and conditions knowing that losses can be re-cooped by claiming your property. So, the interest rate you get is likely to be lower with a secured business loan. Banks take more risks by offering unsecured loans. You do not offer them property as collateral to reduce risk and hence, you will be charged a higher interest rate. This is the way to protect the bank’s interests.

When you offer collateral, it is important that you have a good idea of the value of your collateral. Your financial institution will use different sources to assess its value. So, before you present your appraisals, make sure they are current and gather comparative information. Different borrowers and lenders will vary greatly in their appraisal; this is why, you need comparative information. You can include classified ads for assets of similar value, records of sales, or anything else that can be of help. This information may help you negotiate better terms and conditions if you reach an agreement on a higher value for your collateral.

Note that this may not be easy. Most financial institutions are very conservative when it comes to valuing collaterals. The reason is that if you default, the bank has to use additional resources to take your asset, offer it to potential buyers, and sell it. Many borrowers consider that the value of their collateral is what they paid to get it. Banks, on the other hand, are only interested in the fair market value of your collateral. If you find it difficult to assess what an asset is worth, you may want to use the services of an independent appraiser. They will come up with a value which is close to the value banks will assign to your collateral.

When applying, banks will require more than offering collateral. They will look at your equity contributions, revenues, business credit, balance sheet, company history, and more. Even if you run a healthy business and pass their credit check, you still need to offer a tangible guarantee that you will repay the loan.

Offering collateral is even more important if you have a poor credit score. In fact, many financial institutions will not approve your application without collateral in this case. With collateral, they may even offer a lower APR, although your credit score is low. Apart from a low APR, the lender may also offer a longer repayment period. This is beneficial for startup businesses, with their profits just starting to grow.