Introduction
In order to secure financing for your business, you need to provide some sort of collateral.
Collateral is an asset or property pledged as security for a loan or other obligation; in this case, the loan being applied for with the lender.
In simple terms, you will use an asset like a piece of real estate, equipment or stocks as collateral that the bank can seize if you don’t repay.
The idea behind collateral is simple: if lenders are taking risks issuing loans, they want to ensure they get their money back in one way or another and therefore require a guarantee from borrowers.
Secured and Unsecured Loans
Secured loans are backed by collateral, meaning that if you borrow money and can’t repay the debt, the lender can take your collateral (e.g., a house or car) to satisfy the loan amount.
Unsecured loans don’t require collateral — they’re not secured against anything if you default on payments. If you have an unsecured loan, the bank will pursue collections through other means like garnishing wages or filing a lawsuit against you in court.
In general, secured loans tend to be for larger amounts of money than unsecured ones, but this isn’t always true; it all depends on how much equity (value) there is in whatever asset is being used as security for the loan. In addition, many types of secured loans have shorter terms than their unsecured equivalents: For example, some mortgages are paid off over 15 years rather than 30 or 40 years like most car loans would be repaid over that same time period!
Fixed and Floating Collateral
Floating collateral is a type of collateral that can be used to secure a loan. Floating collateral is not tied to a fixed asset, such as a building or vehicle.
It instead provides the lender with flexibility in case the borrower chooses to use their collateral for something else instead of repaying their debt. For example, if you have some money in your savings account, you can take out a loan against it and use the money from that loan toward any expense or debt payment you need to make — even if it’s unrelated to what your savings were initially meant for!
Using Equity to Finance Business
It’s important to understand the difference between a secured loan and an unsecured loan, so that you can make an informed decision about which type of financing is best for you.
The two main types of loans are secured and unsecured. A secured loan imposes collateral requirements that must be obtained by the borrower in order for them to receive financing, whereas unsecured loans do not require collateral like real estate or stocks.
In some cases, you may even find yourself with both secured and unsecured debt on your balance sheet depending on how much money has been borrowed from each source.
Legal Considerations for Collateral
- The lender’s rights to seize the collateral
- The lender’s rights to sell the collateral
- The lender’s rights to use the collateral as security for another loan
- The lender’s rights to use the collateral as security for a guarantee
Appraisals and Insurance
Appraisal: If you are seeking a loan, bank representatives and lenders will want to ensure the value of the collateral is greater than the amount owed on it. A professional appraisal will give them confidence in your ability to repay your debt.
Insurance: If you are unable to pay back a loan, insurance will cover any damages to the property if it’s destroyed as a result of fire or natural disasters like floods and earthquakes.
The use of collateral, especially where the lender has legal recourse to seize it, is an important criterion in getting your business loan approved.
- Collateral is a valuable asset used to secure a loan. This can be something such as real estate, jewelry, or even intellectual property.
- Collateral is also used as a guarantee against default on the loan by the borrower. The lender will seize whatever collateral was posted to secure the loan in case of default by the borrower on his or her obligations under the agreement.
Conclusion
The use of collateral helps the lender minimize risk, which increases the chances of a loan being approved.
One of the best uses of collateral is to release equity from your house or property to provide additional working capital. If you do plan to use collateral, be sure that you understand all the legal implications and consider getting a valuation report on any valuable assets you may have.
