What are collateral business loans, and what assets you need to leverage to get one? 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: Are There Business Loans That Don’t Require Collateral?
Yes! There are a variety of business loans that do not require any collateral at all. They’re called unsecured business loans, and they’re very easy to get!
Unsecured business loans do not require any collateral at all, whereas secured business loans do. Here are a few examples of unsecured business loans:
- Unsecured Small Business Loans: Flexible or fixed terms, short and long-term options. Unsecured business loans work just like regular business loans, but don’t require any collateral, and can be even more cost-effective with more accommodating terms.
- Unsecured Business Lines of Credit: Not technically a loan per-say, but similar in that you are given capital that you pay back over time. The difference between an unsecured credit line and a business loan is that you only pay back what you use, with no collateral requirements necessary–with ongoing terms! Decide exactly when and how much you use.
- Equipment Financing: Use the equipment itself as collateral, NOT your own assets.
- Cash Advances: Leverage a portion of your customers’ sales as collateral, instead of your own capital.
These are all financing options that are popular with business owners that do not wish to put their personal or business assets at risk in case of default.
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 business owners, peace of mind is not just valuable, but vital.
Lesson #5: Can You Qualify for Collateral Business Loans with Bad Credit?
Yes! NBC approves 90%+ of all business owners who apply for collateral business loans–and unsecured business loans as well–regardless of their credit score and extensive financial history.
This isn’t something you see every day
Lesson #5: Where Can You Get an Unsecured Business Loan?
Simply call (877) 482-3008 to speak with a member of our team, or fill out our simple 1-minute application online to get the ball rolling, and receive secured or unsecured business loan of your choice in as little as 24 hours!
We are excited 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.