How Collateral Can Help You Secure Better Business Loan Terms

How Collateral Can Help You Secure Better Business Loan Terms

Most new businesses need two things at the outset: money and good credit. Unfortunately, it can be hard to get loans without good credit and impossible to build a credit history without a loan in the first place.

You will probably be able to find a lender somewhere, and if you have collateral to back a loan, you can often use it in place of a good credit history to secure it with better rates and terms.

Assets Lower the Lender’s Risk of Losing Money

Lenders make money by charging interest on the money they lend. But they also take the risk that the borrower might default on the loan. Using your assets to back the loan can significantly lower the lender’s risk. Should you fail to repay a loan, lenders can seize your assets and sell them to get as much of their money back as possible.

Collateral Can Strengthen Your Loan Application

A business loan application consists of five factors that operate on a sliding scale: credit history, repayment capacity, capital, asset-backing, and loan conditions. For example, if you have great credit, a strong cash flow, and plenty of cash and assets, the loan conditions will probably be very favorable.

Poor credit history and the typical financial struggles of starting up a business won’t prevent you from getting a loan. However, it will drive the conditions up. Using any assets you have to back your application can help make the loan terms more affordable.

Almost Any Asset Can Be Used To Secure a Loan

There are two classes of assets: liquid and illiquid. Lenders generally prefer cash or liquid assets. Such as stocks, bonds, or certificates of deposit — to back loans because they can be converted into cash quickly. You can also use illiquid, or fixed, assets for most types of loan collateral, but you will likely need to have them appraised for a declared value.

Sometimes, the inventory, equipment, or vehicles you purchase with the loan becomes the collateral for the loan. If you fail to repay, the lender simply takes the asset back. In other situations, you can substitute a personal guarantee, pledging your assets if your business doesn’t have what the loan requires.

Procuring financing should already be a part of your business plan. Even if you don’t own much to start, get creative and figure out how you can maximize your assets to build your business.

Contact Champagne Global Capital Lending for commercial finance options.