Starting a business is nothing less than an achievement, but ask any entrepreneur, you’ll realize that Starting up any new business requires substantial capital. Even if you are thinking of or expanding the existing business infrastructure, you will require a sufficient amount of funding. The obvious choice to raise such funds is by getting a business loan. However, unlike a personal loan, which is collateral-free, a business loan requires you to provide some form of collateral as a form of security. Banks generally demand a collateral as the amount for a business loan is usually high. Moreover, running a business is a risky affair. Not all start-ups take off as they financially would have planned to. Similarly, some businesses do experience heavy setbacks resulting in a sufficient loss of financial capital. In such cases, it becomes extremely difficult to repay the business loan. Thus, to ensure that they can recover the loan amount, most banks and money-lending institutions offer asset based lending for business loans.
What qualifies as a Collateral for Business Loan?
Collaterals are any material things owned by a borrower, whose value can help recover the loan amount in case the borrower defaults.
Discussed below are some examples of collaterals used to get small business loan-
Perhaps the most common asset provided against a business loan is property. This property could be your house, farming land, or factory land. Since property prices are skyrocketing today, it makes sense to put your property as a form of collateral against your loan. However, one must make a proper assessment of his/her loan repayment capability, as otherwise; there is a chance that the borrower can lose on the property.
In case the borrower is not able to provide any conventional material asset, he/she can offer to pledge the business inventory as the collateral. Business inventory includes raw materials, work-in-process or finished goods that are yet to be sold in the market.
Your financial savings such as fixed deposits or any other form of bank savings can be used as collateral against your business loan. However, there is a lot of risk involved in securing your savings as collateral, as in case your business faces any loss and you are unable to pay back on your business loan, you might also lose whatever savings you have made over the years.
Apart from the above-mentioned options, a borrower can also pledge assets like accounts receivable, factory machinery and equipment, jewelry, or vehicles as a collateral for an asset based loan. However, a borrower has to maintain maximum caution as the bank or money lending institution holds the right to seize the asset in case of the non-repayment of the loan amount.
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In case you are facing difficulties in arranging collaterals, you should check out meaning of SME Loan.
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