Getting enough funding is important for the success and growth of any business. Access to capital will help fund the expansion of the business, buy new equipment, or even hire more staff. However, acquiring a loan from traditional banks isn’t easy and is unfavorable, especially with limited credit histories or low revenues. Luckily, the collateral can come to your aid. It is an alternative way to get funds for the business owners. It will be easy to secure a loan with a collateral. And, most lenders use your collateral and amount you need to ascertain the interest rate you will get.
Let’s discuss what collateral constitutes and its role in securing business loans.
What’s Collateral
Collateral simply means an asset or property a loan applicant provides during the loan application. It stands in for the loan in case the borrower defaults paying back. Usually, the value of the collateral must always be equal to the loan amount or more. Having collateral makes you a less risky borrower. This improves your chances of getting a better offer that you couldn’t have access to. Some items that can be used as good collateral include real estate, business inventory, cars, and cash savings.
Unlike instant loans without documentation, business loans will require a lot of documents. This is because lenders will need proof of the collateral you are providing and the process might be long. Generally, those loans provided with the help of collateral are estimated based on the percentage of the asset’s market value. The risk of losses is greatly reduced if there is collateral. Besides, the lender sees the borrower is serious about acquiring the funds.
Therefore, collateral is the key to accessing an affordable loan at lower interest rates. Besides, it gives you a great chance of getting your loan approved.
What are Items that Can Be Used as Collateral?
There are many items that can be accepted as collateral by lenders. However, different lenders accept different types of collateral. Remember, using collateral on the loan comes with risks, despite it giving you a good chance of loan approval. You might lose the asset if you fail to repay the loan.
These are some types of collaterals used when availing a secured loan;
➢ Inventory
Businesses that deal in making and selling products can use the inventory as collateral. The unsold inventories the firm produces are pledged during loan application. If a person decides to go this route, they have to update the inventory periodically to the lender to make sure the loan is collateralized properly.
➢ Cash
Collateral can be in the form of cash, either as savings or deposits. Such collaterals are always the gold standard for most banks. It’s seen as a low risk since it is simpler to get their funds back if the borrower fails to repay. When you provide cash as the collateral for your business loan, you cannot get it until you finish paying the loan.
➢ Home equity
This is the most common collateral offered when availing the business loans since the home used is a very valuable asset a person may have. However, most lenders will take a small percentage of the equity accrued on the house as collateral.
➢ Vehicles
Your car can also be a better form of collateral for business loans. Most lending companies will provide a loan that is about 100 percent of the car’s value. So, a borrower needs to check if the particular lender allows vehicles to be used as collateral.
➢ Accounts receivable
There is also an option of using the accounts receivables from the business as collateral. Such loans are known as asset-based loans, and they’re usually smaller because determining their values is difficult. But, the accounts receivables as collateral items can be a better option is you don’t own many valuable assets such as real estate.
How Collateral Affects the Process of Availing Business Loan
Collateral is an important aspect of securing any loan. No matter the loan you are acquiring, even if it is an NBFC loan, collateral will enable you to get a good deal. Even though unsecured business loans, most lenders will not agree to give out funds because it is risky. Often, business loans are secured loans and require collateral.
1. Collateral will affect the loan approval
If your firm is in its early stages of growth or your credit history isn’t the best, you can use collateral to avail of the business loan. The collateral will increase the chances of loan approval. Lenders will be quick to approve a secured loan compared to an unsecured loan because it is not risky. They will have no worries about your repayment capability because they have the asset on hand and can easily use it to pay the loan.
2. Determines the Interest Rates You Can Get
Just the way collateral is important in loan approvals, it is also crucial in the interest rates. Most of the time, the loan will have low interest rates if it is secured and higher rates if unsecured because the secured loans are less risky for the lender. With a collateral, you may get an inexpensive loan than the payday loans.
3. Affect the Payment Tenures and Loan Amount
The loan amount you qualify to get is directly related to the value of your collateral. That is why those people who want to get more funds will go for a secured loan. Moreover, you may also get flexible tenures. You can choose the tenure you find suitable, depending on your current financial situation.
To Sum Up
Collateral is an important aspect to factor into your business loan application. It opens doors for better and favorable deals even when your credit history and score isn’t hale and hearty. Learning its role in securing a business loan will go a long way in making sure you succeed in availing funds at better terms and helping your business to flourish.
If you are ready to secure funds for your business needs, choose the best loan app in India and apply for your loan with the simplest prequalification process.