The Ins and Outs of Collateral
If you are looking to grow your business, you are probably considering getting funding. In this case, you will certainly need to consider collateral. Small business loans are typically the cheapest types of loans, but you will typically have to put up some sort of collateral in order to secure this type of funding. When you are looking for funding from banks or private lenders, they will typically set their rates, loan amounts, and terms based on the type and amount of collateral that you are able or willing to offer them.
What is collateral?
Collateral is a personal or business asset, such as an investment or real estate, which a loan applicant will offer in order to secure a loan, as a way to guarantee the loan to be repaid. In this case, the applicant agrees that the lender can take control of the asset if the loan is defaulted on.
Why do banks want collateral?
Lenders need collateral for a simple reason – they want to get their money back in case you stop repaying your loan. They want to lend to people who have skin in the game. Banks typically want their loans to be fully collateralized, meaning that you need to offer your lender collateral worth 100% of your loan.
What can you offer as collateral?
Different lenders require different types of collateral, so there are a few different options you have for this. Just know that when you offer up collateral, you assume the risk that you will lose that asset if you default on that loan. Here are some commonly collateralized assets that lenders accept:
Cash
Real estate and home equity
Automobiles
Commercial properties and equipment
Accounts receivable and purchase orders
401(k)
Credit card transactions and deposits
How much will you need?
Prior to accepting a loan contract, thoroughly consider your loan amount and how it accomplishes your business’ goals, as well as the amount of collateral that you are willing to put up. Typical banks like for their loans to be fully collateralized, but some private lenders may be less strict with these requirements. On the downside, these lower-collateral loans will typically have higher interest rates and a smaller loan amount.
What if you cannot put up collateral?
Many individuals and small businesses looking to obtain funding have a lack of valuable assets to put up as collateral. In this case, your best bet is to seek out an unsecured loan, meaning a loan in which you are not required to put up any collateral. One of the most popular alternative to loans is a credit card. The downside of these types of loans is that the terms that the lender will offer are typically less favorable for you and your small business, but the upside is that you do not have to put any of your assets at stake.
If you are looking for any type of loan, with a particular form of collateral, connect with our knowledgeable account executives to learn about how we can help you find a loan that is right for you, fitting in with your business goals.
