When looking for a business loan, having a collateral to secure the loan will not only help with getting approved, but also the cost of the loan. The risk is that the lender has the ability to obtain the collateral if you default on the loan. But because the interest rates for secured loans are usually lower than unsecured loans, it is best to weigh the options and see if the costs benefit the risk for your business.
But before speaking with lenders, its best to evaluate what assets your business can use. Here are some assets that can be used:
Real Estate
Probably the most common collateral banks look for. Real estate is fairly simple to appraise and holds its value in the event of repossession. Business lenders can use your business’s real estate or personal as collateral.
Lenders will look for the amount of equity you have in the property, because the amount of mortgage owed would reduce the value of the collateral.
It is suggested to get an independent appraisal once you decide to use your property as collateral.
Vehicles
Business vehicles, as well as any personal vehicles, can be used as collateral. Similar to real estate, the lender will look if there are any loans on each vehicle to assess its worth.
Valuing the vehicles can be used with vehicle research companies such as Kelly Blue Book.
Inventory
Inventory your business sells may be considered collateral as long as you have a track record of inventory and strong sales history. Lenders will evaluate the current and future value of your inventory to determine that cost of the loan.
For most lenders, inventory is valued usually at wholesale cost or at the market value, whichever is lower.
Equipment
The equipment you use to operate your business, such as printing machines, has value at which can secure a loan. Lenders will typically lend a certain percentage of the value of the equipment.
Same as inventory, equipment is appraised at wholesale cost or market value, whichever is less.
Accounts receivable
Factoring (selling) your outstanding account receivables will allow you to receive financing based on the value of your income invoices, which requires less appraisal time than other assets. This give you the cash needed faster than with other assets. The requirement is to have a decent size amount of invoices as different lenders have different minimums.
Accounts receivables are underwritten based on the value of the portfolio minus collection and default costs.
Others
Alternative lenders will be more creative than traditional banks when it comes to helping you get a loan. This is why before deciding on moving forward with either a secured or unsecured loan, speak to a variety of business lenders and see what flexibility each lender has. It is important to note that it is in your advantage to secure the collateral that is least important to your business with the highest appraised value. That way you minimize the loss in case of default and still able to get a secured loan at the best price. This requires negotiation on your part.
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