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!

20 Jan,2023 11:07 IST 2868
What Types Of Assets Might You Use For A Collateral-Based 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.

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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.

Sapna aapka. Business Loan Humara.
Apply Now

Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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