07/11/18

How to Use Collateral to Secure a Business Loan

If you’re looking for a loan to kickstart your business or fund growth, you have a lot of options. One big choice to make is whether you want to apply for a loan secured against collateral (that is, your assets), or an unsecured business loan.

Using collateral provides you with a range of advantages, including a higher chance of qualifying, more loan options, better payment terms, and lower interest rates. On the other hand, unsecured loans usually don’t involve as much paperwork, but the qualifying criteria are generally more strict. The main advantage is that your asset won’t be in jeopardy if you’re unable to keep up with your payments.

The process of applying for a secured loan can be daunting for someone who hasn’t done it before. Here are a few tips that can increase your chances of a successful application.

1. Find Out What You Can Use as Collateral

Most traditional lenders have roughly the same definitions of what constitutes collateral. There are the assets you own outright and the assets that still have loans against them. Don’t worry too much if you already have a loan secured against your main asset (like your house); the new lender will often agree to refinance your existing loan as part of the process.

Wondering what could be used as collateral? Most large assets qualify.

An acceptable asset is something of real value that has a title of ownership. In most cases, property is the asset most lenders want to see. You can also secure business loans against cars, boats, industrial equipment, and any other legally-owned asset that is worth more than the loan amount. Other assets to consider include business lines of credit, business inventory, and guaranteed future income.

2. Maintain Detailed Records of Your Assets’ Value

Banks and loan providers are exceptionally thorough in their assessment of assets during the loan application process. They need to know that, should you default on repayments, their investment is covered by the value of your asset. This is why you need to be realistic about how much your asset is worth in the current market.

Ask an independent auditor to value your asset at the earliest opportunity. It’s a good idea to record the asset on your business’s balance sheet from day one. Your ability to keep accurate financial records will play a part in the decision-making process.

3. Assess the Risks Thoroughly

Once you have a loan offer, it’s a good idea to run it past an independent financial advisor, especially if you aren’t a financial expert yourself. You need to understand the risks fully before you commit. After all, you’re effectively signing over your asset to the bank until you’ve repaid that loan in full.

What will you and your business do if the lender takes that asset? It’s painful to consider, but you and your financial advisor should make a plan for the worst-case scenario. Weigh the risks against the benefits of getting the business funding you need. It’s also a good idea to look for alternative funding methods at the same time—giving yourself options.

4. Don’t Be Afraid to Haggle

Banks tend to advertise their headline business loan rates, but that’s not to say you can’t secure a better deal if you’re willing to negotiate. Research viable alternatives before you go into any negotiation in order to give yourself some leverage. After all, you can always walk away and get your loan from another provider.

If you’re not happy with how the lender assessed your application, ask for a review—particularly if you believe your asset has been undervalued, and you can support that belief with evidence.

5. Create a Good First Impression

When it comes to using collateral to get a secured loan, cash flow and capital are the most important factors in your loan application. However, they aren’t the only ones! You also need to demonstrate to a lender that you’re investable. A conventional lender like a major bank might look into your personal life and history, including your education, your work experience and your track record in business. Everything from the clothes you wear to how you communicate might affect your chances of success—so have your resume ready and make a good impression.

More Options Are Out There, Too

All of these tips are vital to your chances of a successful loan application with a conventional lender—but they’re not the only things to consider. After reviewing your options, you might decide not to go with a traditional bank lender at all.

The emergence of new technologies has made a range of alternative solutions available. New alternative lenders using AI and machine learning have brought more accessible credit options to a wider range of business owners, and brought lending online. Now, small business loans are becoming available to more owners than ever. Fast, simple, and convenient, this lending route might be an attractive option for your small business, especially if you’re looking for faster funding and less paperwork.

Finding financing is easier than you think.

1 free application, access to 75+ lenders.

About the author

 Irene Malatesta, Content Strategy at Fundbox
Irene Malatesta, Content Strategy at Fundbox

Irene is a business content strategist with Fundbox, passionate about working with entrepreneurs and mission-driven businesses to bring their stories to life. Fundbox is dedicated to helping small businesses grow by democratizing access to credit.

Comments

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Get more small business tips from Lendio.

More like this