Collateral and Your Small Business Loan
A Home Business Article Contributed by Alina Sandor
What Does Collateral Have to Do with My Small Business Loan?
You've probably heard that you need collateral to get a small business loan. But what is it and what does it have to do with your small business loan?
Collateral is the assets that you are willing to put up to secure a small business loan, and is used as a secondary form of payment. It could be your house if you own it, or your car. It could be land property. No matter what it is, most importantly, it has to be some tangible item of substantial value.
Small Business loans that use tangible assets as collateral are called secured loans. Secured loans are better than unsecured loans (loans with no collateral) because they have lower interest rates than unsecured loans. This is better for your business because they are easier to pay off, making less stress on your budget.
The Problems of Collateral for a Small Business Loan
A major problem you may run into when using collateral to secure your small business loan is that if you are unable to pay for the loan in full, you may loose the items you put up for collateral. The bank has full authority to reposes any items you may have put up for collateral if the agreement is broken. The assets can be seized and sold. The money gotten from selling your collateral will be used to repay your loan.
Plus, your lender can spend money to recondition or refurbish your collateral items in advance of the sale or lease, then the costs will be added to your unpaid debt, making the balance even more! And once you are in default, your lender will probably try to use the easiest, quickest method for disposing of the collateral, like auctioning the item on Ebay, and that may not ultimately bring about the greatest recovery.
Another problem is that even if you have incorporated your business, your lender will probably require you to guarantee the loan personally and will almost always require you to pledge your business assets as well. This can be bad news for a person with no collateral. Though lack of collateral will not be the sole reason for being turned down on a loan, it helps.
How Does Revolving Collateral Effect a Small Business Loan?
Collateral which changes constantly, such as accounts receivable or inventory, is called revolving collateral. It is a common practice to use your own business' inventory as collateral.
A lender can repossess collateral by entering your residential or business property and simply take it. When a person defaults on a loan involving accounts receivable, your lender can notify your customers that it has a security interest and request that they send future payments directly to the lender. If the loan security agreement requires, or if for some reason your lender is unable to repossess your collateral, your lender can seek a court order requiring you to give up the collateral.
