4 Types of Collateral To Secure Your Loan
When you take out a business loan, you may need to provide collateral to secure it against. This is some form of asset that the lender can take ownership of if you default on your loan. Many business owners that are new to commercial lending are often unsure of what they can use to secure their loans. These are four examples to help you make a better-informed borrowing decision.
The simplest way to secure any loan is with real estate. This could be your commercial property. Doing this is especially common if you are taking out a commercial real estate loan. The loan is secured against the property you are buying, in the same way, that your home mortgage works. Some real estate loans are also secured against existing property.
However, you can also use your real estate to take out loans for other reasons. For example, if you need a working capital loan, you can use your property like taking out a second mortgage. Finally, you can also use personal property. Be cautious before doing this in case you end up losing your business and your home.
You may be able to use your inventory to secure a loan. Putting up your inventory is a relatively simple way to handle this transaction and many lenders will accept it. Obviously, your inventory will likely turnover during the life of the loan. However, it should remain sufficiently valuable to protect against defaults.
Of course, if you fall behind on payments, you may be risking losing your inventory. Keep this in mind when you go to borrow.
You can also use your equipment as an asset to secure your loan. The lender is likely to accept this but may want to evaluate the potential depreciation and the liquidation value. After all, the lending company doesn’t want your production machinery, it wants the money.
Finally, you can use your invoices in a similar manner to your inventory. This is often less viable for longer-term loans. However, if you have a business-to-business company and regularly have accounts receivable, that asset has value. This may be the least risky option because you only miss out on your current receivables. That is only if the lender will accept this option, of course.
Keep the above in mind when you need to provide collateral for your loan. There is no safe option that will leave no impact if you default. However, you should keep in mind how far-reaching the problem will be if you have to forsake the assets you use to secure your loan.