In order to grow any business you require capital. If you’re serious about increasing your company’s potential, acquiring a small business loan should be the priority for you. However, before you can get approved for a loan, lenders will pick apart and scrutinize both your company’s credibility and yours. Even if you pass your credit check, most lenders will still require a tangible guarantee that their investments will be repaid. This is where collateral comes in.
Collateral is described as a form of security that assures your potential lender you have an alternate source of repayment for your loan, should you become unable to make your payments. Although that which can be defined as collateral is quite broad, it’s the lender that decides what is worthy and what is not worthy. Property is often considered the most desirable form of collateral as it is typically worth a lot. For you as a business owner, property could be:
- A piece of land owned by your company.
- A warehouse owned by your company.
- A storefront owned by your company.
Considering how integral collateral is to obtaining a loan, here are some guidelines for securing a loan using your assets and how to lessen the chances of defaulting on your loan.
Read our article “What do I Need to Get a Small Business Loan?” to learn how to get the money you want.
What Can and Cannot be Used as Collateral
As we discussed above property is often the most desirable form of collateral, but it is not the only kind of collateral. There are many different forms of assets that can be used as collateral to help secure a loan for your business. Including but not limited to:
- Business inventory
- Accounts receivables
- Equipment: tractors, factory machines, other heavy equipment
- Credit card transactions
Business Inventory and Accounts Receivable
This is a form of asset based lending that is an effective way to get a quick influx of capital to your business. An example of where you could use this approach is if your business receives a large purchase order. If you need to borrow money in order to fulfill these demands, a lender will allow you to use the purchase order as collateral.
You can also consider using any equipment your business owns as collateral. Industrial productions machines and heavy equipment can both be used to secure the funding you need.
Credit Card Transactions
Future credit card transaction can also be used to secure what is called a merchant cash advance. With this type of funding you’ll be given a loan and then use a small percentage of each day’s credit card sales to pay back your lender.
Learn more about merchant cash advances here.
Keep Track of the Worth of Your Assets
Lenders are infamous for undervaluing the borrower’s assets. Considering this, make sure your assets are being fairly evaluated. It could be worth the effort to seek out an independent appraiser. Now that you know the true worth of your assets it is equally important to keep detailed files of your assets. When lenders are reviewing your file for a loan, they will want to see that you are keeping up to date in these matters. There’s a common misconception in the business world that keeping track of such things is complicated and time consuming. In reality, all it really takes is an Excel spreadsheet.
Being Wary of the Risks
It’s possible for you to use a personal asset to secure funding for your business, but it’s not always the best idea. When deciding which asset you’re going to use as collateral you need to be wary of the risks. Keep in mind that if you were to default on your loan your lender has the right to seize the asset you put up as collateral. This means that if you put up your home to secure a loan for your business and your business fails, you could lose your home.
When the Opportunity Presents Itself, Negotiate
Remember that if you have a good credit history and are a qualified borrower, you can always reject a lender’s offer and seek out better opportunities. Lenders are notorious for undervaluing your assets. To combat this, you can always request an appraisal review of the asset’s value. Also be wary of predatory lending approaches, where a lender does not ask for collateral but will charge extremely high interest rates.
Consider all Options: Peer-to-Peer Lending
If you are struggling to secure a loan and asset-based loans are not ideal for your situation, there are alternate routes that can also be explored, such as peer-to-peer lending. There are many peer-to-peer lending sites that connect those who want to invest money with those who want to borrow money. For the small business owner, this is an effective way of getting capital quickly. These peer-to-peer lending sites allow borrowers to post a loan amount on a loan listing. Based on a chain of criteria, lenders choose which loan they would like to invest in. Afterwards, borrowers make monthly payments to the lender directly, through an online account. This financing route can enable you and your business to get the funding you want.
Choosing the Best Option
Asset based lending is a great option for most businesses, small or large. But it’s imperative that you make the right choice for you and your company. Start by finding a lender that wants to work with you to achieve your goals and then discuss your loan options to find the best funding for your unique business needs.