Which Business Assets Are Best Used as Loan Collateral?
Jan 22, 2020 23:49
Securing a business loan often requires collateral. And for lenders, collateral means security against the risks involved with lending money. When the borrower defaults, the lender will possess the collateral in place of the unpaid debt.
Although business loan applications require a rigorous vetting process, it is not enough to cover all possible risks involved in lending. As such, it is the borrower’s responsibility to fulfil the obligation if he does not want the lender to take over their asset. In this article, we will take a closer look at the most common business assets used as loan collateral.
One of the most common collaterals used in asset-based business loans is real estate. Of course, real estate is valuable and easy to liquidate, and there is always a market for property. Moreover, many business owners already have some home equity which can be used to secure a business loan. Since the housing economy has already recovered, there is already a good level of confidence in backing loans with real estate.
But despite the convenience of using your property to secure a loan for business, there are also considerable disadvantages. If you used your family home, for example, you run the risk of losing your property in case of a default.
This type of collateral option is only available for companies that manufacture or sell products. But accepting inventory as loan collateral depends on your lender. Not every lender will consider that your products equate to the value of the money you borrowed. To vet the application, the lender may require a third-party to audit and verify the value of your products.
Similar to real estate, you can use other real property as loan collateral. The most common option would be any vehicle owned by the business. Another example would be equipment and machinery. That said, it all depends on the current valuation of your property as well as the effect of depreciation.
Company savings account
Some lenders may accept your company’s cash account as loan collateral. One apparent reason is that cash is the fastest way to cover losses in case the borrower goes in default. Furthermore, it eliminates the hassle of liquidation.
Typically, you will apply for a cash-secured loan from your financial institution. Since the account is with the same bank that lent you money, the risk on their end is lower. While this option is beneficial for lenders, it may not be the best choice for borrowers. Using your company’s savings account is risky because of the possibility to lose cash flow in case of default.
Unpaid invoices can be a problem for businesses because it ties up cash and slows down profits. As a solution, there are lenders that specialize in accepting invoices as collateral for a loan. This option is excellent for companies with less than stellar credit rating. Your company benefits significantly from immediate funding that can be funnelled back into the business in the form of new inventory, equipment, or paying off outstanding credit.
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