bank concept

Leveraging Collateral to Secure a Business Loan and Grow Your Company

The backbone of a successful business loan is collateral. Almost every financial institution will require collateral—a piece of real estate property, car, business inventory, or personal savings—to approve a business loan. Generally, a loan offer will only make up 85% of the value of the collateral. If you are putting up $20,000 worth of assets, you can only get $17,000 from the lender.

If you think about it, that’s not such a bad deal. After all, if you renege on your loan, the lender will have to liquidate your assets (except if it’s cash) to recuperate the money they lend you. They will give back the excess from the profits of selling your house, for example, and take the amount you owed them. This is how hard money lending works. While many people are scared of potentially losing their physical assets because of a business loan, it also hinders your ability to start your own business.

There are other options to get a loan, but that will mean having an excellent credit rating. Also, you will have to propose an almost foolproof business plan to show the lenders the potentials of the business. These are harder to be eligible for than simply applying for a business loan and putting up assets as collateral.

Fortunately, there are also ways to protect your collateral when you cannot pay the loan anymore. You can also leverage it to get the best rate that will still be possible for you to pay even if the business does not succeed. Remember that putting up collateral will give you access to lower interest rates. You have a better likelihood of getting approval, too.

Keep a Detailed Record of Your Assets

How can you know that you have enough collateral to put for a small business loan? You need to keep a record of your assets. Whether it’s your personal residence, vacation home, cars, furniture, business assets, and the like, you have to know which of these will be good collateral for a loan. You can hand over this list to your lender, so the agent can give you a breakdown of what to expect when you use them for your loan. You will see the difference in interest rates depending on what asset you will choose to use.

If you have an array of assets such as a fleet of vehicles, you may want to use a software program that will keep track of these. This way, you can keep an eye on what assets will be valuable to put up as collateral. Once you have this list, the lender will run it through their own set of data to determine what rates they can offer to you.

Do Your Own Work

start up owner

Don’t play a guessing game with your assets. It’s natural for people not to have an idea of the value of their assets. How much do you think your car is worth right now in the market? While you may have an idea about the value of your business inventory, determining its value in the eyes of the lenders is difficult work.

The best way to go about this is to find an appraiser. They will give you a fair idea of the value the lenders will assign to these assets. You can give this same report to the lenders. At the very least, you will not be easily hoodwinked into questioning the value of your assets. With the appraisal report, you get a good idea of the true value of the assets.

One of the benefits of doing your research is the bank will know you’re keeping an eye on your investment. This will push them to give you a better and fairer deal. You can also enlist a financial advisor’s help to help you pick the right kind of loan and what collateral to use for it.

Compare Offers

Don’t apply to only one lender. Avoid the temptation of signing your name on the first one who offers a loan. Take the time to compare the loans—interest rates, terms and conditions, and the loan-to-value ratio of the collateral. If you feel that there’s something wrong with the contract, listen to your gut feel and don’t sign your name. Have a lawyer or accountant or financial advisor check the contract. Ask them questions so that you’re better informed about the terms.

You have to ask yourself this: is expanding my business worth the loan? Growing a business is almost always worth the collateral you will put up to avail of a loan. However, there’s nothing wrong with being pragmatic and careful about applying for one.

Morris Internet Group

MIG is your all new source of the latest news, updates, tips and tricks in making your business grow and prosper.

Contact Us

    Scroll to Top