All companies need working capital in order to perform their business, and a business loan can be a great way to obtain some money upfront so you can get things moving in the right direction. Many lenders require businesses to provide collateral in order to secure the loan. The purpose of collateral is to give banks some kind of assurance that the business will not default, and if they do, the bank may use the collateral to repay the balance. Here is what you need to know about using collateral for a business loan.
What Can Be Used As Collateral?
In many cases, business owners will need to provide their own homes as collateral for a business loan. Offering your home gives banks the assurance that they can recoup their losses by selling your home if you don't pay up. While this option is very risky for the owner, it is often the only option they have to secure the loan. As long as you're making monthly payments on the loan, this should not be too much of a concern. Other options for collateral can include your current company's inventory and accounts receivables. The lender may seize these assets in the event of default. Make sure you give the bank accurate information about what kind of collateral you have to offer.
What Happens If You Do Not Pay?
If something happens to your business and you're unable to repay the loan, the lender may seize your assets in order to recoup any financial losses they've incurred. If you have put your office building up as collateral, for example, the bank can declare that property theirs. This also goes for any equipment you may have put up like company vehicles, computer equipment, or other assets. This is why it is so important to repay a collateral-based loan. You stand to lose a lot of merchandise, property, or other important assets if you fail to make payments.
What Are Some Alternatives To Collateral?
Some lenders will provide companies with loans that don't require the use of collateral. The Small Business Administration has a wealth of resources for companies including other loan options. Another alternative you can try is to obtain a peer-to-peer loan. These types of loans require investors who will help contribute to the total amount of money you need to borrow. The investors set the interest rate that you must repay the loan in order for them to make a profit. Most peer-to-peer lending services do not use collateral, so it's a good option to look into if you're not too keen on collateral-based business loans.