What Can Be Used for Collateral for a Business Loan?
Making sure you have access to funding is one of the most important aspects of operating a business. This can be particularly true during the startup phase of a business endeavor. Although it is possible you can be approved for an unsecured loan, you may be able to obtain more favorable loan terms if you provide some type of collateral. For many lenders collateral may be a requirement for somebody in your specific situation.
What is collateral?
An asset that you pledge to a lender for purposes of securing a loan is known as collateral. The lender can legally seize the collateral asset in the case of you defaulting on the business loan. This arrangement ensures that the lender is not the only one who has risk of loss in the case of the loan not being repaid. Collateral can be physical assets, such as real estate, or more liquid assets such as cash. The type of collateral accepted will depend on the lender’s policy.
Usually, lenders will accept real estate as collateral for a business loan. Many people will even use their own home as collateral. However, it is usually not preferable to put up personal property, especially the home you live in, as collateral for a loan.
Another option for collateral may be business equipment. This can include office equipment, manufacturing machinery, or any other equipment your business may own. The lender will usually estimate the current and future values of the equipment. Many will require that the collateral equipment be insured.
You can also consider using a work or personal vehicle as business loan collateral. If the loan was used to finance the vehicle, the vehicle itself will serve as collateral for the loan. Defaulting on loan payments can result in the lender seizing the vehicle.
If you have a product-based business you may be able to put up your inventory as collateral in order to secure a loan. Many startup businesses will use a loan to purchase inventory to sell. In this case, the inventory is automatically considered collateral.
Collateral for a business loan can also be accounts receivables, which are the outstanding payments owed to you by clients for work performed or product delivered. Some lenders will require that you inform your clients their outstanding invoices are being utilized as collateral.
Putting the funds in your savings account on the line in order to secure a loan is another option that many lenders will not refuse since it is an easily transferable asset. However, it may not be the best idea to put your personal savings up as collateral.
Providing a personal guarantee to secure a loan means that the lender will be able to seize your personal assets and not just assets owned by the business in the case of default on loan payments. The lender will usually only seize personal assets if business assets do not cover the value of the lender’s loss.
Financing strategy for your business
Every business needs to have some type of financial strategy that is comprehensive in order to achieve success. This can also be integral in making sure you can repay your loans. Professional financial advisors have the expertise and knowledge to help you deal with your business as well as personal finances.
Any opinions are those of Paramount Wealth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of business loans, referred to in this material. It has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary and does not constitute a recommendation.