What Types Of Assets Might You Use For A Collateral-Based Loan?
Unlock the value of your assets with a collateral-based loan. Read to find out what assets you can use as collateral to get a secured business loan!
If you plan on getting a small business loan, your lender may require collateral to minimize their risk and secure the loan. With various collateral options available, it is challenging to figure out which business loan in India will work best for you. Several perks and drawbacks are associated with each, which can impact your personal and business finances.
Secured Versus Unsecured Loans
An asset-based or secured loan uses collateral assets as security. The business asset is any property that the business owns and controls. The lender can take control of the collateral asset if a business defaults. Lenders do this to ensure repayment in case of default and minimize risk.
Unsecured loans are the opposite. Lenders consider factors like creditworthiness and years in business when determining how much to lend. The interest rates on these loans are generally higher but do not require collateral. Lenders cannot take possession of the business' assets as repayment if a borrower defaults.
Below are the asset types you should use for a collateral-based business loan in India.
Different Types Of Collateral
1. Real Estate Collateral
Business owners often use real estate as collateral for loans. The main reason why lenders prefer this asset type is that properties retain their value over time. A lender can also offer more financing if the property has a higher value.
Any type of property could be collateral, such as a commercial building or a home owned by the business owner. Defaulting on a loan, however, can cause the borrower to lose their asset, which can be problematic if it's a family home.
2. Business Equipment Collateral
It is a viable and low-risk collateral option, especially for construction and manufacturing companies. Using business equipment is a more financially secure choice than pledging any type of personal property. Unfortunately, business equipment tends to depreciate over time. Your chances of securing more funds are unlikely if you own worn-out machinery.
Lenders may also hesitate to accept specific business equipment as collateral, especially if it is hard to find a buyer.
3. Savings Account Collateral
It is also possible to use business savings accounts as collateral. Banks, among others, prefer cash as collateral because it is relatively straightforward. Lenders can recover their money without selling physical assets when borrowers default on their loans. The lender may view it as low-risk, but the borrower may perceive it as risky since they might lose their savings.
4. Inventory Collateral
The inventory of a product-based business, such as a retail store or an e-Commerce store, may serve as collateral for securing financing. However, some lenders do not accept inventory as collateral due to its difficulty in selling.
The use of inventory can also negatively impact your revenue. By defaulting on payments, you risk losing inventory and, as a result, losing the ability to generate profits. It could lead to trouble with other creditors or even bankruptcy for your company.
5. Invoices Collateral
Late payments and outstanding invoices plague many businesses, particularly construction companies. Consequently, you may need additional funding due to cash flow problems.
Some lenders offer financing in exchange for outstanding invoices from your business. Rather than waiting for your customers to pay you, this is a great way to get much-needed cash fast.
The disadvantage is that you will still have to pay fees and interest to lenders. Ultimately, you'll earn less money than if you were paid directly by your clients.
6. Blanket Lien Collateral
A blanket lien is an intangible collateral asset. Liens are legal claims against assets of businesses as security for loans or debts. A blanket lien gives the lender the right to claim a lien on as many assets as necessary to repay a defaulted loan.
It gives lenders much protection, but business owners risk losing everything. Borrowers with liens may have challenges getting a new loan since a lender already has a claim on their assets.
7. Investments Collateral
A business loan or line of credit can be collateralised by investments, such as stocks and bonds. Like cash, investing in liquid assets can help you repay creditors quickly. Banks commonly use this type of collateral, but fintech lenders don't.
Market conditions can, however, affect investment valuations. You may be in a difficult situation when your investments lose value below the borrowed amount.
Apply For A Business Loan With IIFL Finance
IIFL Finance is one of India's leading NBFCs specialising in providing comprehensive and customised business loans. You can apply for an instant business loan online for up to Rs 30 lakh with disbursement within a few minutes. Online business loan applications require minimal paperwork. Loan interest rates are attractive and affordable so that repayment is not burdensome. Apply today!
Frequently Asked Questions
Q1. What is collateral?
Ans. A collateral is an asset that a business owner deposits to reduce the lender’s risk when applying for a loan (or another type of financing).
Q2. Do all business loans require collateral?
Ans. Some lenders do not require collateral for a loan. Credit history, financials, and the reason you need funds will determine whether you have to pledge assets to get financing.