Do You Need to Have Collateral Assets for a Business Loan?
If you want to apply for a business loan from a bank, you’re going to make the best case when you come in organized and ready to answer any questions about your assets. After all, the most important portion of the business loan application is collateral.
I Have Collateral Assets to Use
That’s great news! The bank is more likely to approve you for a larger loan. Collateral assets include real estate property, business inventory, cash savings, and other physical items –anything that has a title that the bank can take over from you.
Pros of Having Collateral Assets
- You’re likely to be approved for almost any loan size you ask for, as long as it’s in proportion with your assets.
- You should confirm your asset worth with a secondary opinion from an appraiser. You want to make sure you know exactly how much everything you’re offering the bank is worth. Have detailed records ready for the bank to review. Account for everything they could possibly ask, and you’ll look extremely polished, which is always a great sign to the bank.
- Most likely, you’ll get a low-interest rate loan. That doesn’t mean smooth sailing of course, but it’s one less thing for you to worry about.
- You’re in a wonderful position to negotiate, especially if you’re a larger business or highly credible small business. Get yourself an even lower interest rate. Change your repayment terms to something you’re more comfortable with. If you’re unhappy with the bank’s offer, meet with other banks until you receive an offer that you want. The bank loses out on a high-potential customer when it doesn’t relent some aspects of your business loan.
Cons of Having Collateral Assets
- Your bank prefers tangible items because they can be easily repossessed if you default on your business loan. It’s a great idea to have a Plan B and Plan C in mind in case things go downhill.
- Your personal life could be affected by the bank if you’re not good about paying back your loan. Make sure you’re not putting up your house as collateral for a risky business plan that your partner came up with.
- Your undeveloped plot of land does not count as collateral. Banks literally call this type of ownership “dirt.” Your property must have a standing structure built on it.
I Don’t Have Collateral Assets to Use
Don’t worry! You probably already know you won’t be approved for a multi-million-dollar loan, and you likely don’t need that large of an amount anyway. The important thing is to prepare yourself with much more information to give the bank.
Pros of Not Having Collateral Assets
- The bank will look at all aspects of your business: your company history, credit, revenue, balance sheets, equity contributions, and more.
- Your personal credit and cash savings will boost your likelihood to receive the loan amount you’re requesting. That’s assuming your credit is consistently high and that you have a sizable amount of cash savings.
- Similar to the point mentioned above, organizing whatever documents you have makes an incredible first impression. The organization aspect is especially important for small businesses, who must prove themselves to financial entities like banks. A simple Excel workbook will do the job!
- Your mortgage could serve as collateral if you don’t outright own your house. This is a huge risk to take. So, if you’re unsure about your business plan, it is worth your time to meet with a business advisor before getting a business loan.
- If you just landed a huge contract, it will count as collateral. If you need the business loan to fulfill the big contract successfully, the bank will consider the contract as an asset.
- Maybe you don’t even need a bank, consider peer-to-peer lending. You may want to go this route due to lack of red tape, need for collateral and co-signers, among other reasons.
Cons of Not Having Collateral Assets
- You may still need collateral or even a co-signer, especially if own a small business. This will depend on your bank and their leniency, plus the company details we mention above.
- Be careful with what you ultimately use as your alternative collateral. There is always the risk for failure, and you should be ready to say goodbye to whatever collateral you’re using to gain the loan.
- Owning a limited liability company (LLC) won’t save you. The bank will still come after your personal assets. Do not assume your LLC will save you from anything without consulting your financial advisor and lawyer first.
- If the bank doesn’t require collateral, you will probably be offered a high-interest loan. If you think you can wait a year for the loan, spend 12 months building up your assets and credit and apply for a much lower interest loan. Beware of others’ experiences with these types of banks too; your time will be well-spent researching the institution’s reputation among other business owners.
No matter what your situation is, the size of your business, and how many assets you have, you always have options to secure that business loan you need.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.