What Is Used as Collateral for Business Loans?
Many business owners have been there more than once: You’re in the process of applying for a much-needed loan and think your chances of approval are pretty good, when you notice that the loan would require you to put up some assets as collateral, and you become uncertain of what this would entail and whether it’s worth the risk for your company. While not required for all business loans, it’s common for a lender to require you to put some “skin in the game” and reduce their risk by agreeing to allow them to take certain assets in the event that you default on the loan and can’t repay the amount. This is a common practice. However, you may want a deeper understanding of what exactly can be used as collateral first.
Not All Assets Can Act as a Security Guarantee
While some lenders may be flexible on what types of assets they’re willing to accept, some are perceived as better or more useful than others, and not all types of assets can act as the sort of security guarantee lenders usually want to see. For example, lenders generally prefer assets that could easily be seized and turned into cash. As you might expect, this class of assets includes money in various forms. Other types of assets might still be accepted, but not necessarily always preferred, since they could be tougher to seize and convert. These could include company property, business equipment and more.
You May Be Able To Use Future Money in Some Cases
If you have particularly good credit and are perceived as exceptionally trustworthy, you may be able to convince your lender to put up future money or earnings instead of cash, property or something similar. This means the lender assumes more risk, since it’s not guaranteed you’ll end up with a certain income, but it could make a deal more secure for you.
Check for Unsecured Loans
Finally, although many loans, called secured loans, do require collateral, you can always shop around for an unsecured loan that won’t require you to put anything up instead. These may be more difficult to qualify for, but could give you the peace of mind you want.
Though many business loans may ask you to put up certain assets in order for the lender’s risk to be reduced in the deal, this does not mean you shouldn’t apply for or shouldn’t consider those loans. Instead, having a better understanding of what exactly counts and can be put up as your assets could help you to weigh whether the risks involved are ultimately worth it for you and your company.