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Starting a new business can be a very exciting time for an entrepreneur. Being ready to open a small to mid-sized business is one thing but knowing how to secure funding is another one. You will most likely get the financing you need through a business loan and the backbone of a successful business loan application is collateral.
Read on to learn more about the concept of collateral and discuss how you can leverage yours the right way to fund your business.
What Is Collateral?
Collateral refers to a piece of property that a borrower pledges to a lender to help secure a loan. Proving that you have collateral effectively establishes you as a better lending risk to banks and third-party lenders, and it opens the door to better loan options that you might otherwise not have had access to. Items that make excellent collateral include real estate, cars, business inventory, and even cash savings you have accumulated.
Loans offered against collateral generally constitute a percentage of the collateral item’s estimated market value. Collateral makes it less risk for lenders to loan people money as well as it shows that you are serious about repaying the borrowed funds.
Collateral is your key to accessing to lower interest rates and gives you a higher likelihood of approval in the first place.
How to Leverage Collateral to Your Advantage
To speed up the process of being approved for a business loan via collateral, it is recommended that you keep a detailed record of your assets. You can do this simply by entering the information into an Excel spreadsheet and hand it to your lender. Researching online to find software programs available is another option too.
Once you have a record of your assets, you can present it to a prospective lender where they will run it through their own set of criteria to determine its true value.
What to Do If You Do Not Have Collateral
It is still possible to get funding if you do not have enough collateral. There are lenders that offer unsecured business loans, meaning that the loans do not require collateral. You will need to also have superb credit ratings to qualify.
If you do not, do not give up. You will need to think creatively and discover there are plenty of options available to you. Shop around in order to find the most reputable providers and the lowest interest rates and then apply online if they have online application services available.
Common Mistakes
One of the most common mistakes made by entrepreneurs when it comes to collateral is overestimating the value according to the current market. Remember that the lender will have to take possession of your collateral if you default on your loan.
Do not play guessing games if you are unsure as to the true worth of your assets. Instead, find an appraiser that can give you an idea of the value a bank would assign to them as well as show your lenders a report. You want to maintain personal records that attest to the running value of these assets over time. This helps ensure banks that you are paying attention to where it counts.
Understand the Risks
Make sure that you fully understand what is at stake when you use collateral to secure a business loan. If you default on your loan, you will lose the assets whether they consist of your home, your car, or savings.
If you do not have enough collateral to get the loan you want, make sure you have considered all possible sources and do not be afraid to make suggestions to your lender or think outside the box for other alternatives.
Prepare to Pitch Your Plans
Be prepared to go into detail during the application process. Tell your lender exactly what the business will bring to the community and how you will make sure that it becomes financially successful.
Lenders want to see evidence that you have thought through everything and that you will put the money to good use. A well written and detailed business plan will go a long way.
Compare Your Offers
Once your potential lenders finish reviewing your applications you will receive offers on potential business loans from those interested. It might be tempting to accept the first offer that comes through, but you will want to wait until you get more offers so that you can compare and choose the best option.
Pay attention to the total length of repayment and the interest rate when comparing. If you are still unsure of which to choose, seek help from a financial advisor before you decide.
The Bottom Line
Before you accept a given offer, speak with your financial advisor about the value of your collateral as it relates to the rates you were offered. Then try to negotiate in favor of terms that reflect the true value of what you bring to the table.
