Exploiting Your Assets: Using Collateral To Secure A Business Loan
If you’re applying for a small Business Loan, chances are you may be asked to pledge some assets as collateral. We simplify how collateral works, and how you can get a collateral free loans.
Sushant Sharma, the founder of a travel-planning startup in Gurgaon, was in a fix. His staff had outgrown the office location. The cubicles were busting at the seams, and his new assistant had to set up shop in the kitchen. The good news was that it meant that business was booming and was ready for expansion. Unfortunately, it also meant adding an additional location or picking up and moving to a bigger space, which would come with significant up-front cost and increases in the overheads. Sushant didn’t have the funds on hand to make it happen, was looking at alternative sources of funding.
That is when a colleague advised him to secure a small Business Loan via collateral. Sushant got to know that loans for small business are mostly backed by a valuable asset, called collateral, which the lenders can foreclose on if the borrower fails to repay. Sushant did some research and found the following pointers to follow before starting the loan process:
- Understand What Collateral is:
When you apply for a loan for small business, a lender will scrutinize your credit score, your business’ current revenue, and other factors to see if you’re a viable borrower. If you pass the check and you operate a healthy business, most lenders will want to secure their investment by requiring you to put up some form of collateral. Pledging a collateral for a Business Loan means giving an additional and tangible guarantee to lenders that their loan will be repaid. These are assets that can help you ‘secure’ a small Business Loan, and which the lender can foreclose on if you are unable to repay your loan. Loans without collateral are unsecured loans. A bank or other lender is more likely to agree to a secured Business Loan than an unsecured loan.
- Learn What Lenders Prefer as Collateral for a Business Loan
Since it requires some effort to liquidate the acquired asset(s), banks and lenders will prefer collateral which can be easily auctioned or sold. Make a note of this when you’re deciding which assets to pledge for your secured Business Loan. Collateral for a Business Loan can include assets that you own, as well as those you have a loan against. If you’re putting up an asset which have a title of ownership, a lender will give the loan only if they can get the title back. If it’s an asset you have secured a loan against, a lender can refinance your previous loan and claim the title.
- Choose the Collateral You Want to Pledge Carefully
A short-term secured Business Loan is usually covered by inventory or receivables, while a medium and long-term loan for small business is secured by real estate and automobiles. Which assets can you use as collateral for a Business Loan? Some options are:
- Property: The equity on your home as well as vehicles you own can be used as collateral for a Business Loan. However, no lender will accept empty plots of undeveloped land to cover the costs of your secured Business Loan if you’re unable to make your payments.
- Business Inventory: Any inventory you have for your business may be considered collateral for a Business Loan. For example, if you run a perfume manufacturing unit, you can use the value of your equipment like blending mixers, filtration systems and perfume capping machines to secure a small Business Loan.
- Accounts Receivable: Own a business in which you bill clients for services? Your accounts receivable can be used as collateral for a Business Loan. You will need to provide the lender with a comprehensive balance sheet and past sales records, post which you’ll be eligible to borrow an amount depending on the money you have coming your way.
- Cash Deposits or Savings: In general, banks and lenders prefer assets that are easy to value and turn into cash. Cash deposits or savings are one of the best collateral for a Business Loan, since the lender can cash in your account if you don’t repay the loan. Less risk equates to lower interest rates, which is why cash-secured Business Loans may be priced below the prime rate. However, remember that once you pledge your certificates of deposit, bonds or securities as collateral, you cannot access that money till the loan period is over.
- Shares: Lenders are also open to finance secured Business Loans in exchange for shares as security. This allows you to secure a small Business Loan while continuing to earn dividends from your shares. What if the value of your share securities falls short of the loan amount or drops considerably? The lender may ask you to pledge additional shares or sometimes even cash.
- Know Your Asset’s Worth
If you’re looking to secure a small Business Loan, pledging in some collateral establishes you as a better lending risk to banks and other lenders. What is more, you can get better deals on loans for small business than you might otherwise not have had access to. But is there a way to speed up the process of being approved for a secured small Business Loan via collateral? You can start by going through your business assets, and having those you are willing to put up as collateral for a Business Loan valued. Ensure that you consider the fair market value of today, and not what you paid for it. Not sure of what your assets might be worth? It could be worthwhile to utilise the services of a third party evaluator to give you an idea of how the bank or lender will value your property.
- Leverage Collateral to Your Advantage with Records
Another thing which can help you secure a small Business Loan faster is keeping an updated and detailed record of your assets on your balance sheet. The lender may want an appraisal, performed by a certified appraiser, to set the value of your collateral for a Business Loan. This is where having all the business records helps, for you can easily prove that you own the asset, and its value. Records are also relevant when a lender is reviewing your documents for your secured Business Loan application, and show that you’re paying careful attention to all of the relevant factors.
- Make a Note of the Risks
Make sure you fully understand what’s at stake when you offer collateral to secure a small Business Loan. If you default on your secured Business Loan, you will lose the assets you’ve pledged. Therefore, be realistic about your company’s needs and decide whether the company actually need the funds from a secured Business Loan. If yes, refrain from putting up anything that you cannot afford to lose, such as your house. A good idea is to approach a financial advisor who can help you assess the risks of using certain assets as collateral for a Business Loan, as well as the odds of the loan repayment being successful.
- What If You don’t Have Enough Collateral?
Are you falling short of the collateral for a Business Loan? Should you give up? The answer is no! If it’s a relatively smaller amount, you can avail collateral free loans for your business. Bajaj Finserv offers loans for small business up to Rs. 30 lakh without the need for any collateral or guarantors. Since Sushant had no collateral and wanted to secure a small Business Loan below this limit, he wasted no time in opting for a Business Loan from Bajaj Finserv. He was able to set up a second brand. Also, since having an extra set of hands around would help him focus on the big picture, Sushant also invested some loan money in hiring new talent. Like Sushant, you too can avail the advantages of a collateral-free Business Loan.
To opt for a Business Loan without collateral from Bajaj Finserv, simply log onto our website, fill out a basic application form and submit some documents.