When you step into the office of a loan provider for that necessary business loan to make improvements to your company, you should know that they are examining more than your financial status and business plan. The amount of collateral that you are offering as a security is a big factor that weighs heavy in loan approval process.
Banks are in the business of lending money, but they need to minimize the risk of their loan offer in order to protect themselves in the event that you default on your payments. By offering collateral to back your application, the lender is protected from financial loss.
Definition of Collateral:
Collateral is a term used to refer to tangible items that can be liquidated and resold by the bank in order to recover the outstanding portions of your business loan.
In the case of a grocery store, for example, collateral would include business machines such as, the cash registers, weighing devices and food freezer. In general, perishable items, such as fruits and vegetables, cannot be considered collateral. However, some nonperishable inventory, may be considered.
The Use of Collateral When Applying for a Loan
Banks are in the business of lending money, but they need to minimize the risk of their loan offer in order to protect themselves in the event that you default on your payments. By offering collateral to back your application, the lender is protected from financial loss.
If you own the property where you do business, or have a home or a car, you may want to bring in the ownership papers. When you apply for a business loan, it is a good idea to bring a complete list of items that you may be able to utilize as collateral to support your loan application. This will increase your attractiveness as a loan customer. Make sure that any documentation, such as appraisals, you may have regarding your assets, are no more than six months old.
The loan officer will take these documents, and at their discretion, complete their own appraisals of your assets. When they are finished and satisfied with your application, they will return to you with an offer and a request for collateral.
It would be in your best interest to see how they have valued your assets. Banks will typically undervalue your assets in order to cover any costs that might be incurred by liquidation. This is meant as a safety measure for the bank, but some loan officers can be overzealous in their duties and give your assets an unrealistically low value.
When the value of your collateral is set too low then you could be required to offer more collateral than necessary. Alternatively, the lender may choose to raise the interest rates or decrease the principal amount offered to counteract the supposed shortfall. Therefore, do not be afraid to negotiate for a more favorable appraisal.
Getting a business loan from a bank is a labor-intensive experience. Even if you possess superb negotiating talents, it may result in a financial prison that could sabotage your ability to do business or in the worst cases, be the cause of your bankruptcy.
Many small business owners have avoided business loans all together and have taken advantage of business cash advances with great success. A business cash advance is a form of funding whereby a financial facility purchases future credit card transactions from you. Since the amount given to you is your own money, there are no interest charges and no obligation for repayment.
