What assets can I use as collateral as part of a secured business loan?
While the popularity of unsecured business loans has picked up recently, most small business owners tend to opt for secured business loans first when trying to obtain business finance since they often maintain a lower interest rate. Find out what assets you can use as collateral to be able to make use of a secured business loan.
How does collateral for secured business loans work?
Where unsecured borrowing, is exactly that, unsecured, while secured finance requires collateral to cover the business loan amount in the event that you are unable to pay it back.
To secure the loan, you will need to put forward an asset which may come in many different forms, as will be further discussed below. Lenders tend to prefer secured loans compared to unsecured loans because having collateral on hand provides them with peace of mind and lowers the level of risk they need to take on. This is because if the borrower defaults on the loan and is unable to pay it off, the lender can sell the collateral and use the money from the sale to make up for their loss.
Lenders will usually require you to pay for an independent valuation of the asset that you may want to use as security, this can be a time consuming process. Once the lender determines the value of your asset, they’ll use this information to figure out the amount you can borrow, the term of the loan and the interest rate.
Which assets are considered acceptable forms of collateral for secured business loans?
There are several different assets which you may use as collateral for a secured business loan. The most common form of collateral for a secured business loan is a property owned by the business owner. This property may be commercial, residential, or even rural. Other viable options, though less common, include high-value assets such as equipment, vehicles, trucks or even the equity within your business.
The type of asset being used as security along with its value can impact the amount of funding you can borrow as well as the loan term and interest rate.
BUSINESS LOANS SECURED BY REAL ESTATE
As mentioned, securing your loan against real estate is the most common form of collateral. This is because properties are easy to value and sell, making them a preferred option for most lenders.
BUSINESS LOANS USING EQUIPMENT AS COLLATERAL
In most cases, high-value business equipment can also be used as collateral. You’ll likely need to pay for your equipment to be independently valued, and the lender will want to inspect the asset to ensure it is good condition. Having maintenance records and knowing exactly how much of the asset has been paid off is also handy to have as the lender may require it. Each situation is unique, however where equipment is being used as collateral, lenders will typically lend 80% of the asset’s market value.
What if I decide I want to sell the asset being used as collateral?
You might be able to sell an asset which is being used as security for a secured business loan, providing that you obtain permission from the lender and are able to offer up another form of security which they deem acceptable before you try to sell it.
What if I don’t have eligible assets to use as security?
Many start-ups and businesses that are still in the process of growing don’t always have access to the assets they need for a secured loan or may not want to tie up the limited assets they do have as collateral. If you are in this position, unsecured finance may be the best option for you. While unsecured finance may be more convenient, it is important to note that unsecured business loans tend to come with higher interest rates and shorter loan terms so that the lender is able to make up for the additional risk they are taking on. Read more about secured v unsecured financing.