As a small business owner, you recognize the importance of financing. Most businesses rely on financing to help support their operations until they can generate revenue. One of the primary ways to secure financing is through offering collateral. Collateral involves offering an asset to your lender that they will take possession of if you cannot repay the loan. Lenders accept collateral as a way of minimizing risks when providing loans. Here’s a closer look at collateral small business loans.
- Collateral Options
Lenders generally accept assets that they can easily exchange for cash. That’s why small business owners may use stocks, treasury bonds, and corporate bonds as collateral. Another form of collateral involves hard assets like equipment, cars, or real estate. However, many lenders require hard assets to be appraised before accepting them so they can have a clear idea of their value. Some collateral small business loans may even require you to sell your home or car.
- Loan-to-Value Ratio
Another essential part of collateral in small business loans is the loan-to-value ratio. The loan-to-value ratio is the amount a lender will offer by measuring your collateral’s value. Highly valued assets differ slightly between the overall market value and the loan amount. Many lenders only accept collateral with higher market value than the amount they’re lending, as that minimizes risk.
When figuring out your collateral, lenders normally look at your capital, credit history, and ability to repay your loan on time. Be aware, though, that the Small Business Administration may approve your loan request if you qualify in other areas but lack collateral.
- Liens: A Last Resort
Liens are a worst-case scenario. Liens occur when a lender decides to sue for failing to repay the loan. Some liens seek a specific asset, while others want the business’ assets.
Secure Lending Solutions for Small Businesses with EDC
Collateral small business loans safeguard lenders by requiring borrowers to pledge valuable assets. For inquiries, contact us at the Economic Development Collaborative team. We are ready to assist in evaluating your choices and finding the best solution for your needs.