he terms of the loan will be determined by the lender. Your credit score, annual revenue and the term period for the loan are just a few of the factors a lender will look at when determining how much interest to charge as well as other terms of the loan. Many times a lender will require some type of collateral to secure the loan.
What is collateral?
An asset you pledge to a lender to take out a loan is known as collateral. The lender will have a legal right to seize the collateral asset in the case of you defaulting on the loan. In this way it is not only the lender with something to lose in this financial arrangement. Collateral assets can be either physical or non-physical. Requirements for collateral will vary with each lender.
One type of asset commonly used as collateral for a business loan is real estate. Usually, real estate is used as collateral for longer term business loans. Real estate collateral could be any type of property you own, such as a commercial building or even your own residential home. However, it is generally better to avoid putting your personal home up as collateral for a business loan.
You may want to consider putting up equipment your business owns as collateral for a business loan if your lender will accept it. This may include heavy equipment like cranes or tractors or even your office equipment.
Another option is using a vehicle as collateral for a business loan. This can be either a personal or work vehicle. If the loan is obtained for the purpose of purchasing a vehicle, then the vehicle automatically becomes collateral for the loan.
If you have a business which produces or resells some type of product, you may be able to put up your inventory as collateral for a loan. Also, a business needing a loan to stock their inventory can take advantage of inventory financing. This means the inventory purchased with the loan would be considered loan collateral automatically.
Money in your savings account can also be used as collateral. Many lenders may find this attractive since cash is easily transferable in the case of a default.
Outstanding invoices for money clients owe your business may be used as collateral for a business loan.
A lender is legally entitled to seize your personal assets if the terms of the loan agreement include a personal guarantee. This would occur if other forms of collateral are not adequate to cover the amount outstanding on your defaulted loan.
Negotiating the best loan terms
It is important you have a comprehensive understanding of your business finances when deciding on which loan terms would be acceptable to you. Each business will have unique needs and varying ability to put up assets as collateral. Having this understanding will help you tremendously when negotiating the terms of a business loan.
Our two Certified Exit Planning Advisors (CEPA), Jodi Perez and Eric Miller, are financial professionals who specialize in helping business owners with their unique situations. They help create financial plans for the business and owner. In addition, Jodi and Eric also examine the business industry, the owner’s tolerance for risk, the business operations and possible tax consequences.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and investors may incur a profit or a loss. Past performance does not guarantee future results.