6 Tips to use collateral for small business loans

July 16, 2019

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In today’s world, there are thousands of avenues that can be explored to initiate a business. You can have an idea for a huge business from the get-go or you may have the idea and aspiration for a small business that can be scaled up with time. However, what often proves to be a hindrance in the implementation of a business idea is the financial capital. Not everyone has finances to kick-start a business and that’s where the idea of business loan comes in. In contrast to this situation is another scenario, where your business may already be up and running but you need a loan to expand your business, as your profits alone cannot provide you that capital. Here again, you would need a lender from whom you can borrow.

A creditor does not give you a loan for your business based on the potential of your business idea or the success of your business. A creditor requires from you a warranty before giving you a business loan. A warranty provided by the business owner ensures the safety of the creditor’s money. This warranty is referred to as collateral. A collateral could be anything that can return the value of the money provided by the creditor to the borrower as a business loan.

So, how much collateral do you need for a small business loan? It depends upon the amount of cash you are borrowing from a creditor, who could be an individual, an enterprise or a bank. The loan-to-value (LTV) ratio of your collateral should be such that in case you default on your loan, the creditor can get back the same amount from your collateral as was lent. For instance, if you are borrowing $25000, the collateral must be capable of returning the same value in cash to your creditor.

There are a number of available options for collateral and the collateral is decided upon after taking in consideration a number of factors.

Collateral Options

When you go to a lender for a business loan, you know that you have to go prepared. Depending on the amount of loan you are asking, you should be prepared with a list of things that you can offer as collateral. Your creditor looks into the things that you are willing to offer as collateral and decides what can have the best return for value in case of a default scenario. The following are the collateral options that most creditors are willing to consider:

  • Real Estate Property
  • Equipment
  • Corporate bonds
  • Accounts receivables
  • Cash
  • Personal assets
  • Inventory
  • Blanket lien

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As mentioned earlier, whatever you are providing as a collateral needs to have the same value in cash as the amount you are borrowing as your business loan. You should consider carefully what you are putting up as collateral. If you put up your personal asset like your house as a collateral, it can create a lot of trouble for you in case you default on the loan in addition to the possibility of not repaying the loan in full. Therefore, it is essential to consider all the factors before applying for a business loan.

The creditor will carry out an evaluation of your assets that you are putting up as collateral before drawing up a loan agreement with you. Sometimes, the only collateral that some lenders accept is a blanket lien. Here you won’t be required to put any of your property/asset as collateral and in case you default, your creditor will own your business and anything affiliated with your business.

P.s. If you are reading this article because you are a Canadian in the market for small business loans, consider Smarter.loans. They’re a loan marketplace in Toronto. Their model is interesting. Basically you pre-apply and they select several loan offers for you. Its a good way to cut down on your loan shopping time.

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