Securing finance for your business when needed is essential to grow your business. You may need capital for buying new equipment, expanding your project, or paying for the training of new employees. You can choose from various types of financing options, but secured business loans are often considered the best option for getting long-term benefits.
One reason why some business owners don’t prefer secured business loans is because of the need for collateral. Lenders need this to reduce risk from their end. If, for any reason, you are unable to pay back the money you borrowed from the lender, the lender can adjust the payment from your collateral.
Collateral can be assets like real estate, inventory, or equipment that you pledge as security for the loan you are applying for. It may be scary to imagine lenders taking away your collateral if you fall short of repaying your debt; but if you manage your finances properly, you will never have to face such a situation. Collateral will save your money in the long run.
Benefits Of Collateral
The collateral not only benefits the lenders, but also the clients, which many people don’t realize. Here are some benefits of collateral in getting business loans.
Lower Interest
When you offer collateral, the lenders will consider you as a low-risk client, so they will offer you better lending terms. You will typically get lower interest rates, about 20-40% lower, compared to unsecured loans, which don’t need any collateral. The lower interest rate will reduce the total interest payments.
More Fund
For a business loan with collateral, you will get a large amount of funding that your business requires for expansion or other projects. You will get a larger credit amount if you can offer a highly liquid asset as collateral.
Flexible Tenure
You will get an advantage in terms of the loan repayment tenure with collateral-based loans. You can expect a longer repayment period, even up to 30 years, depending on the present value and liquidity of the collateral you offer.
Get Funding With a Lower Credit Score
To get a business loan, you need to have a good credit score. However, not all business owners have a great credit score. In secured business loans, lenders give funds to borrowers having low credit score. All you need to do is provide collateral to ensure that the lenders will get their money back even if you fail to repay it.
Tax Deduction
You will get a tax deduction for both real estate and equipment collateral financing. So, it will save you lots of money at the end of the year.
Real Estate And Equipment As Collateral
Collateral for secure business loans can be in the form of real estate, equipment, inventory, and sometimes cash. Most lenders consider real estate and equipment to be appropriate for securing a high amount of loan for your business.
Real Estate
The real estate can be your family home, commercial land, or any property that you own. It is a common form of collateral, as home equity is readily accessible. It has high value, and that’s why the lenders prefer it to other collateral. If you can’t complete the repayment, the lender will take up the ownership of the real estate.
Real estate is a very reliable collateral as there is chance that the value of the property may increase in future. Businesses can leverage real estate to secure long-term loans. Also, if you the business has a strong financial outlook, then you will be confident to use your property or land as collateral. Still, it’s better to use the land or property that has a lower value as collateral, provided the value of the property covers your loan amount and interest. Therefore, in case you lose it, you will not lose everything. You can still continue running your business comfortably. As there is a high risk of keeping real estate as collateral, it is better to do so in case of large loans for major investments.
Business Equipment
If you want the loan to buy new equipment for your business, then you can have that equipment as collateral. The math is simple: if you can’t repay the loan will take ownership of the equipment and sell it to get their money back. It is an ideal collateral for manufacturing or constructing companies that often need to lend money to buy new equipment to improve their business. Instead of using their land or inventory as collateral, they will find it less risky to set the new equipment as collateral. You can also use your existing equipment like a computer and printers, as collateral.
Considering equipment as collateral is appropriate for businesses having high-value machinery. The lender will assess the current market value of the equipment and decide whether to give a loan or not. With business equipment as collateral, you can get a fund equivalent to about 80 to 90 percent of asset value. Examples of equipment that can be used as collateral include: construction equipment, production equipment, medical equipment, and others.
You should perform an accurate valuation of your business equipment to secure a loan. This valuation will directly affect the loan amount, interest rates, and repayment terms. You can use the market value, depreciation value, and replacement cost for equipment valuation. You will have to provide maintenance history and find out the market demand for your business products or services.
Conclusion
You must look for secured business loans smartly. Consider the risk factors before giving real estate or equipment as collateral to the lender. To get loan approval quickly, you must keep a record of all your assets. Don’t guess the value of your asset; assess it by professionals so that you don’t overestimate or underestimate its value.
