Last month, I got the opportunity to advise a client who was trying to get funds to start a new business. He had already done the necessary calculations, and come up with fairly good estimates of the required amounts of money. He was at the stage where he was exploring the available financing options. And in this regard, he was more inclined towards taking a loan. He had already figured out that it would be very hard for him to get equity financing at that (early) stage. He had also come to the conclusion that he couldn’t possibly finance the business using his own resources, as the required sums of money were simply too vast. So that is how he had settled on the option of borrowing.
The main question that arose in my discussion with the client was on the types of assets he could use as collateral for the business loan. Being a highly pragmatic and realistic person, he had already understood that it would be very hard for him to get an unsecured business loan for the amount he required. That is why he was keen on exploring the business loan collateral options.
The discussion I had with my client on business loan collateral options turned out to be a very fruitful one. The client had approached me with lots of doubts, thinking that he didn’t really have anything that could be used as collateral for a business loan. But as we went on with the discussion, it soon became clear that he actually had lots of things that could be used as collateral for a business loan. I ultimately came to the conclusion that there are many people in a similar situation: people who have lots of things they can use as collateral for business loans, yet they are unaware of that possibility. That is why I decided to make today’s article to be about business loan collateral options: with the hope that it may help someone who feels that they don’t have anything they can use as collateral to secure business loans. So we will now proceed to explore the actual business loan collateral options – the main ones. They include:
1. Using business real estate as collateral for business loans
If yours’ is a business that has been in existence for a while, and it has come to possess some buildings (or some other real estate), then you can use such properties as collateral. Given the huge value/equity associated with real estate, you can use it to get rather huge business loans — with which you can then cater for all business’ financial needs.
Most lenders will be more than willing to lend you money, if you are ready to offer your business real estate as collateral. You will also be likely to get the best possible interest rates, if you offer your business real estate as collateral for business loans.
2. Using personal real estate as collateral for business loans
If what you are trying to set up is an entirely new business, then obviously it won’t have its own premises, land or any other type of real estate that can be used as collateral for its loans. But then, there is a possibility that you, as the person who is trying to set up the new enterprise, have your own personal real estate. It could be anything: a holiday home you have somewhere, some rental property you have somewhere, or even your primary residence. You can opt to use such personal real estate as collateral for business loans. Lenders who were initially hesitant to lent you money will tend to suddenly loosen their purse strings, once you show them some valuable personal real estate that you are willing to offer as collateral.
3. Using other personal assets as collateral for business loans
You could be looking at a situation where you don’t have personal real estate that you can use as collateral for a business loan. Or it could be a situation where the only personal real estate you have is your primary residence, and you are not ready to use it as collateral for a business loan. Or, at yet another level, it could be that the amount of money you are seeking to borrow is too small to be secured against real estate — even if you do have the real estate. It is in such circumstances that you can opt to use other personal assets (for instance, your car or something else you happen to possess) to secure the business loan. Whatever personal assets you happen to possess, as long as they are reasonably valuable (and capable of being resold easily), they can be used as collateral for business loans.
4. Using business equipment as collateral for business loans
If yours is a business that has been in existence for a while, and it possesses some valuable equipment, then you can use such equipment as collateral for business loans. Actually, even if yours’ is a new business, and you are seeking to buy equipment for the first time, you can still use the new equipment that is being bought as collateral for the loan used to buy it! It would just be a question of agreeing to have the equipment seized and sold, in case you are unable to repay the loan.
5. Using inventory as collateral for business loans
There is an arrangement that is known as inventory financing. Under that arrangement, if you are borrowing money to buy inventory for your business, you can actually use the inventory that is being bought as collateral for the loan used to buy it! Therefore if you are seeking a business loan with the intention to use it to buy inventory for your business, you may not need to use some other asset as collateral. The inventory itself can be used as collateral, in some cases.
6. Using accounts receivable as collateral for business loans
If yours is an already existing business, and it has sold some products on credit, you can use the money you are expecting to be paid as collateral for business loans. This type of borrowing arrangement tends to work very well if you are seeking to borrow a modest sum of money — say, to protect your cash-flow. This means that you may not need to use some other asset as collateral for a business loan, if you happen to have some money you are expecting from your business’ debtors. You can actually use the accounts receivable as collateral for a modest business loan.