Collateral Business Loans 101

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Wednesday, June 28th, 2017

One of the biggest sources of confusion on the business lending landscape has to do with the concept of collateral. Specifically, many borrowers aren’t sure if they need to provide collateral and, if so, what happens to their assets if they miss a loan payment.

To help unravel this confusion, here is a high-level overview that we can call “Collateral Business Loans 101”. To make things even simpler and clearer, we’ll break this down into 5 lessons:

Lesson #1: What is Collateral?

Collateral refers to tangible assets (like equipment and buildings) and intangible assets (like cash and securities) that borrowers use to obtain a secured business loan. Depending on the loan agreement, collateral can be comprised of business assets, personal assets, or often a mix of both.

Lesson #2: Who Determines and Pays for Collateral Valuation?

The lender determines collateral valuation, and it is paid for by the borrower as an up-front cost. The process can be contentious and controversial, because many lenders — and especially banks — are notorious for under-valuing collateral. For example, a piece of industrial equipment that is clearly worth $100,000 may be valued for collateral purposes at $75,000 — or even lower. Why do lenders lean towards undervaluation? Because it further reduces their risk, since it means borrowers must pledge even more collateral to secure the loan.  

Lesson #3: What Happens to Collateral if Loan Payments are Missed?

In the event of a missed payment, lenders reserve the right to immediately take possession of collateral and liquidate it accordingly to recover the debt. To make this process faster and less costly, some lenders insist on collateral in cash, or other easy-to-liquidate asset(s) like stocks, bonds, precious metals, etc.

Lesson #4: Do You Have to Pledge Collateral to Get a Business Loan?

Absolutely not! This is perhaps the biggest and most persistent misunderstanding and myth. There are a variety of business loan options that do not require any collateral at all. For example, working capital loans, merchant cash advances and business lines of credit are all typically unsecured. Naturally, borrowers must commit to paying back their loan in full and on time. However, they are not at-risk of having their pledged assets (since there are none) taken over and liquidated by lenders. For many borrowers, this peace of mind is not just valuable, but it is vital.

Lesson #5: Where Can You Get an Unsecured Business Loan?

Simply contact National Business Capital, and a member of our team will be glad to learn about your business financing needs and goals, help you understand the details of our unsecured loan products (we offer several), and answer all of your questions clearly, honestly, and without any confusing jargon.

If you decide that partnering with us is in your best interest, then completing an application takes about 2-5 minutes, can be done entirely online, and we’ll provide you with a decision within 24 hours. We approve about 90 percent of all applications, and our number one source of new business is referrals from our huge roster of satisfied customers nationwide.

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