The Right Way To Use Business Assets for Collateral

If you’re trying to qualify for a business loan, there are two main factors that lenders evaluate. First, they want to know your credit score. An excellent credit rating can help you get better interest rates and loan terms. However, even with amazing credit, you may still need to provide some type of collateral. Using business assets the right way can be the difference between getting approved and going back to the drawing board.

What Is Collateral?

Collateral refers to assets that you use as a guarantee of loan repayment. In simple terms, these assets act as a safety net for the lender. If the loan falls through and a business reneges on debt, the bank can at least sell the collateral to recover a part of the loan’s value. Taking care of your credit rating matters because it can reduce the amount of collateral you need to offer or give you a better loan-to-value ratio for your assets.

Should You Risk Your Business Assets?

One of the most serious decisions related to applying for financing is deciding whether to take the chance of losing your business assets. This type of lending is popular, and many business owners are willing to take the risk. After all, having sufficient capital is vital to growing a company and investing in things such as equipment and marketing. At the same time, you need to protect your business’s assets to guarantee continued operations. How can you decide what to do?

Often, it’s good to choose collateral that is valuable but that your business can survive without. For example, risking key pieces of heavy machinery for a construction company may be too dangerous because it can compromise the ability to keep working. On the other hand, if a business has several skid-loaders, dump trucks or other vehicles, using one of them as collateral may not put your livelihood in any real danger. In fact, if you have valuable assets lying around that you hardly use, taking advantage of them to obtain capital can be an excellent business decision.

What Can You Use as Collateral?

Every lender has different specifications for what items qualify as salable assets. Doing your homework is a good way to find out what to use and also the current market value of the asset. Some lenders accept everything from brand-name jewelry to vehicles, while others prefer real estate and machinery. As a general rule of thumb, it’s easier to get approved for a loan if you have collateral that is valuable and easy to sell quickly.

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