Different Types of Collaterals You Can Offer For A Secured Business Loan

Whether your business is small or big, you need finance to grow at any time. A business loan is an excellent source of capital and financial support for your business. There are many collateral-free business loans and MSME loans without collateral available in the market. A collateral loan is the most popular choice among other loans because of its low-interest rate and high amount compared to business loans without collateral.

The borrower submits collateral as security; therefore, the lending term is a secured loan. Most long-term loans with higher amounts get approved through collateral. Also, it is a financial source when your business is not financially fit and you need a small loan based on collateral security. 

This article outlines what collateral for a secured business loan is and the types a borrower can offer to get a financial loan for a business.

What is collateral?

A collateral is an asset, such as property or gold, borrowers offer to lenders to get a secured business loan. It has benefits as well as drawbacks, similar to any decision related to finance.

When you get a loan through collateral, you not only put your asset at risk but also your business’s reputation, credit score, and profits. Lenders can seize your collateral to compensate for their losses if you fail to repay the borrowed amount.

Types Of Collateral For A Secured Business Loan

Commonly six types of collateral can secure a business loan. Collateral requirements for each lender can vary depending on the position of your business and the T&Cs. Putting up each collateral has its benefits and drawbacks. 

The following mentions some common business loan assets to secure as collateral for an MSME loan.

1. Real Estate Property

A real estate property is one of the well-known and preferred assets you can offer as collateral. It is an ideal choice if you want a high amount as a business loan. If you have any real estate property, such as a building, flat, office, factory, etc., it can be offered to lenders to get a secured loan.

You can get a high loan-to-value ratio from a loan against property. When you offer a property, 25-40% of the value assessed is retained as a margin, while the remaining value is lent. However, the amount of margin can vary and be decided based on various factors such as clear title deed, condition, and age of your property, etc.

2. Mortgage on a Property

A mortgage on property slightly differs from a loan against a property. In this, a property mortgaged from another lender for a different loan is re-mortgaged. For example, assume that a small business owner has mortgaged their apartment for a home loan. But they require funds for the business.

Suppose the borrower meets all criteria eligibility for a business loan set by the lender. In that case, they can get a second mortgage on the same property from the same or another lender. The borrower has to sign a Pari Passu agreement with the lender to create a lien on the property.

3. Business Equipment / Inventory

Businesses have inventory for their use or sale. If it’s a manufacturing company, then it might also have equipment. This inventory or equipment can be used as collateral to secure the business loan approval. It can also be used to get a loan to buy new equipment for your business; you can hypothecate the same equipment to a bank to get financial help.

Only offer this type of collateral when your business is in a good position and you are sure about the repayments on time, as your inventory or all equipment is on the line.

4. Invoice Financing

The owner can face significant cash flow challenges when the business has a monthly payment system. The invoice is the official document of your accounts receivable. Unpaid invoices can be a good asset for getting a business loan. You can use it for restocking, staff payment, and generating new opportunities.

When invoices are used as collateral to get financing from lenders, lenders keep them as security. If the borrower does not pay the EMI on time, the lender directly receives the outstanding payment invoices.

5. Investment, Jewellery, and Other Valuables

Businesses have personal investments such as shares in the stock market, policies, or other valuable assets. You can offer these as collateral to lenders and get a business loan.

However, as the market fluctuates frequently, the rule of margin is considered for this type of collateral. Loan-to-ration in this type of agreement can be very low, up to 40-50% of the market value. If the business requires short-term financial help, you can use this type of collateral.

6. Guarantees

It is not precisely collateral, but you can get finance from lenders on guarantees of third parties (individuals) or other businesses. You can use this arrangement as a small business, or if you are the only business owner, where individuals can take your guarantee.

If the borrower fails to repay the loan amount, the guarantor must clear the loan for them.

Frequently Asked Questions

1. What are the most common collaterals to get a secured loan?

The primary purpose of the collateral is to reduce the risk to lenders. A collateral requirement can vary per the different lenders depending on some factors. However, some common collaterals frequently used are real estate, inventory, equipment, and invoices.

2. Why do banks take collateral to give loans?

Collateral is an asset that borrowers offer as a security to banks for a business’ financial needs. If the borrower fails to repay the loan amount, the lender possesses the assets to recover its losses.

3. Is it easy to get a collateral loan?

Yes, getting a collateral loan is easy, but you have to meet requirements set by lenders and put valuable assets at risk. However, collateral loans are the most secure and ideal choice for long-term loans.

Conclusion

Banks and NBFCs offer hassle-free online MSME loans and other business loans. You may reach out to the desired financial institution or bank to review benefits and offers, clarify criteria for eligibility for business loans, and know the business loan interest rates.