Most small businesses need outside financing to enable them to thrive and grow, and one of the most common forms of funding that entrepreneurs look to is a small business loan. However, banks that issue these loans almost always require collateral to guarantee that the funds will be repaid. Collateral consists of tangible assets that you personally or your business own.
Here are some details to be aware of when using collateral to secure a loan.
Decide What Collateral to Use
Assets that you have ownership titles to such as residential housing, vehicles, and significant items of equipment are often used as collateral. Vacant land is not usually accepted. Sometimes if you need the funding to buy inventory, the inventory itself can function as collateral. Banks may also accept large purchase orders that you are using the loan to fulfill as collateral.
Assess the Value of the Assets
Before you offer assets for consideration as collateral, be sure to have them appraised. Maintain a balance sheet with meticulous records of the value of your assets so that the bank can see that you keep these details in a professional manner.
Negotiate If Possible
When you are not satisfied with the loan terms that one lender offers you, obtain offers from other banks so that you have options for comparison. If your business credit is satisfactory, keep looking and negotiating until find a loan-to-value ratio and other terms that are acceptable to you.
Realize the Possible Risk
Work with a financial adviser to assess the risks of using certain assets for collateral. Balance the needs of your company with the repercussions if you lose collateral such as your home or car. Peruse loan contracts careful, and be on the lookout for overly high interest rates or other unfair stipulations. Forming an LLC, or limited liability company, can protect you from losing personal assets.
If securing a loan with collateral doesn’t seem the best move for your business, look into alternatives. For instance, peer-to-peer lending is usually web-based and collateral-free.
For more advice on obtaining financing for your business, contact Safe Harbor Commercial Capital.