Business Loan Collateral

By: EconomyWatch Content   Date: 23 December 2009

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Qualifying for a business loan is not an easy task. A business can succeed in acquiring sufficient financial aid by pledging business loan collateral. Offering collateral improves the chances of obtaining a business loan. This is because it demonstrates the borrower’s seriousness about repaying the business loan, thus instilling confidence in the lenders.

Understanding Business Loan Collateral

 

Business loan collateral can be any asset of substantial value. Common assets pledged as collateral are business land or property and plant/machinery. It must be noted that a borrower can also pledge his/her personal assets, such as a vehicle or residential property, in favor of a business loan. However, offering a principal home as collateral is risky, because should the business fail, not only will the owner’s source of income be blocked, but s/he will be left homeless as the home will be repossessed.  

 

Before offering business loan collateral, a borrower must conduct a thorough appraisal to determine the proposed asset’s true value. These values need to be presented to prospective lenders to get a loan amount estimate. Remember, most lenders conduct a comprehensive assessment before granting a business loan application.

 

Sometimes, the value impressions computed by the lenders and the borrower may vary significantly. Lenders may be conservative while determining the valuation of collateral assets so as to maintain an adequate safety margin.

 

Also, a business loan applicant must keep a record of comparative information, such as recent sales records and advertisements, to dispute the lender’s valuation and obtain a higher business loan amount.  

Benefits of Providing Business Loan Collateral

 

Offering collateral facilitates faster business loan processing, thus enabling to obtain a loan much faster. Other important reasons to consider are:

 

Obtain lower interest rates: Lenders do not hesitate to setup lower interest rates on collateral-backed or secured business loans as it reduces the risk of loan default. This is because when a borrower pledges a high-value asset, s/he is motivated to make diligent payments and ensure that it is not seized.

 

Get flexible repayment options: A lender’s risk on an unsecured business loan is tremendous, requiring low repayment periods to ensure that the loan is recovered faster. Conversely, due to the low risk associated with a secured loan, lenders are willing to stretch the repayment amount.

 

A business loan collateral enables a borrower to qualify for a bigger loan amount. A secured business loan amount depends entirely on the value of the collateral. So, offering a high-value asset guarantees a high-amount loan.


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