Even the best business idea cannot fully succeed without adequate capital; otherwise, how will the idea be implemented? For a business to succeed it needs to grow; and for growth to take place sufficient money must be put into the business. Sometimes getting sufficient money for your business might mean the necessity of collateral.
The challenge, therefore, becomes how you can raise enough capital for your small business. Well, taking a loan might be one way of obtaining capital; however, there are always risks connected to debts. But if the benefits of taking a loan outweigh the risks, then taking a loan would be ideal. Before any lender agrees to grant your request for a loan, they must evaluate your viability to pay the debt, and a form of collateral is also required to secure the loan. Here are five types of collateral most lenders may accept:
Some of the most commonly offered and accepted types of collateral are real estate property such as homes. Real estate assets are often used as collateral because they are usually readily available. If you decide to use property as collateral, take note that if you are unable to pay the loan it will have a drastic negative impact on your finances. Other properties that can be used as collateral include boats, equipment, cars and motorcycles.
Cash Secured Loan
Cash secured loans or a savings secured loan is whereby you apply for a loan in a financial institution where your account is based. So, in the event, you default on a payment the lender can liquidate your account. So, cash account serves as one of the types of collateral.
Another popular approach to collateral is inventory financing. Here, a business owner requests a loan to purchase items that’ll later be put up for sale. This inventory acts as collateral for the loan in case you’re not able to sell your products and, eventually, default.
It is important to note that although some lenders might not view inventory financing as fully secured lending. If the borrower can’t sell their inventory, the lender might have trouble doing so as well, forcing them to sell at a loss. For this reason, inventory financing could be more difficult to secure with some lenders.
Invoice collateral, also known as accounts receivable financing is whereby invoices on outstanding payments are used as collateral. These types of collateral are great when you need cash flow for your business while it is locked up in unpaid invoices.
A lien is a legal claim that’s attached to a business loan allowing the lender to sell the assets of a business in the event of a default. A blanket lien is the most comprehensive of its kind—and the most favorable for the lender. Blanket liens give a lender carte blanche to seize every asset and form of collateral a business owns in order to satisfy its debts.
While blanket liens provide plenty of protection for lenders, they can be onerous for borrowers. Not only do they expose you to the possibility of losing everything, they can also make securing a new loan in order to satisfy existing debts more difficult. Lenders prefer to be in the “first lien position,” so the presence of a blanket lien in that spot could make subsequent loans from new creditors extremely expensive—or impossible to get.