Understanding Collateral

Small business loans are one of the best ways to finance a business. This is because small business owners can borrow as much as they want and this makes it easy to run their businesses. Securing these loans, however, is not an easy task because lenders usually have strict lending standards and failure to meet these standards results in the applicant being denied the loan. These financial institutions are in business themselves and they have to make sure that their investments, which are the loans they advance, are safe and secure. They get to do this by carefully scrutinizing loans applicants so as to determine their ability to repay the loans advanced. To reduce the risks further, most institutions would require the applicants to pledge a collateral to be able to qualify for a loan. Collateral has the effect of making loans less risky to the lender since the lender can cash them to recoup their money should the applicant fail to clear the loan in full. Let’s now take a look at some of the items that qualify as collateral.

Types of collateral.

Collateral is a form of security that assures the lender that he or she will be able to earn their money back in the event that the applicant is not able to pay the loan in full. Since they are a guarantee of payment, you can use them to secure large loans for your businesses. They hasten the process of loan approval as well and business owners are encouraged to have them before approaching financial institutions for a loan. They can also help you secure a loan even when you have a poor credit score since the institutions can cash in on the collateral when you fail to pay up. The items that qualify as collateral are those that can easily be converted into cash. The items should also be easy to value and collect so as to make the repossession processes as seamless as possible. To understand the issue further, here are a few items that qualify as collateral.

1). Real estate.

This is the most widely used type of collateral. It includes residential and commercial properties that the applicant is a documented owner. Financial institutions gladly accept real estate properties as collateral and would advance you any amount that you need up to about 100% of the value of the property.

2). Motor vehicles.

You can also use your motor vehicle as collateral to secure a loan. Financial institutions can advance you a loan up to 100% of the value of the car you pledge as collateral at competitive rates.

3). Inventory and receivables.

These also qualify as collateral for a loan. However, the interest rates charged on loans secured with these items as collateral vary greatly and you should shop around for institutions with the best rates.

Conclusion.

Collateral increases the likelihood of small businesses securing loans for their operations. Without them, you may end up paying higher interest rates for the loans so as to cover the risks involved.