6 Collateral Options to Avail a Secured Business Loan Effortlessly
Understanding secured business loans: learn about collateral, eligibility criteria, and the benefits of applying for one.
You can sustain or expand your business without hassles when you opt for a business loan. However, lenders have strict eligibility criteria, and getting approval on your loan application can be difficult if you do not meet them.
Lenders allow you to apply for a business loan by pledging your collateral or security to overcome this hitch. Read on to know more about this kind of loan, eligibility criteria, and more.
Why Do You Need Business Collateral?
Collateral can be any valuable assets that you can pledge with financial institutions until you repay the entire loan amount. This is a safety measure for lenders to avert the risk of default on the loan and provides security in case you cannot repay your dues.
When you take a secured business loan, you sign an agreement with the lender at the time of the loan approval process. This agreement states that the lender is providing funds against your pledged collateral.
Lenders have the right to sell it and recover the amount if you fail to repay the loan. Most lenders insist that small businesses apply with collateral if they do not have sufficient credit history or business vintage.
Types of Collateral You Can Rely On To Get Secured Business Loans
You can get hassle-free loan approval at a better interest rate when you apply with these six types of assets as collateral:
1. Real Estate
You can pledge your personal property, office space, factory or any other type of property to get a loan for your business.
To calculate the loan amount, banks and loan providers assess the property value based on the property's age, condition, location, etc. Once done, lenders keep 25-40% of the property value as a margin and offer the rest as a secured business loan.
2. Personal or Office Vehicles
Like real estate, you can also get a business loan when you pledge your official or personal vehicles as collateral. You can mortgage your cars, bikes, trucks or any other vehicles as collateral to get funds for your business. Lenders evaluate their value and propose a loan offer based on their condition.
3. Company Inventory
If you are running a startup or a new business, you can also apply for a loan against your stock and inventory. This is called inventory financing. Here, the market value of your goods and inventory helps you get the funds required to maintain your cash flow.
This is especially beneficial for new businesses yet to earn profits or waiting for payments. This way, any small or midsize business can apply for secured business loans even if it does not have a long credit history.
4. Company Equipment
Equipment and machinery are valuable for any business and usually a key component of their production. This is why lenders accept it as adequate collateral to provide a secured business loan.
5. Accounts Receivables
Often, businesses may require urgent funds to pay bills or rent, buy materials and meet other expenses. To fulfil these financial needs, lenders offer a loan against unpaid invoices. With invoice financing, you can pledge the future payment as collateral.
Lenders deduct the loan amount from your account when the merchant or client pays the invoices. This allows you to avoid any loss in business and maintain sufficient cash flow.
6. Personal Guarantor
This is not exactly collateral, but a lender can also give you a secured business loan with a third-party guarantor. The guarantor can be another individual or a business. If the borrower fails to pay the loan or defaults on payment, the personal guarantor is held accountable.
Note that the guarantor must not be a proprietor or partner in the business. Sometimes, banks and NBFCs may also ask for a personal guarantor to increase the security of the loan.
Eligibility Criteria for a Secured Business Loan
Before opting for a business loan, you must fulfil the business loan eligibility criteria. Here are some common parameters to meet:
- Any Indian citizen can apply for a loan
- You must be between 21 and 70 years
- Your business must have a vintage period of at least 3 years
- A CIBIL score above 700 is preferable
- Independent businesses, SMEs or MSMEs can apply
- Partnership firms, proprietorship firms, LLCs, large enterprises, and limited liability companies can also apply
The aforementioned list is not exhaustive and can vary based on the lender. Check with your lender before applying for a loan to avoid unnecessary rejections.
Benefits of Applying for a Secured Business Loan
While a secured loan gives you a better offer at lower interest rates, there are many other benefits of applying for it. Here are a few of them:
- You can apply for a sizeable loan amount of up to ₹10 Crores
- You can choose a flexible repayment tenure as per your financial capacity
- With the secured loan, you may get a higher value against your assets
- You can get quick approval and sanction, provided you meet the loan eligibility terms
- You can negotiate with the lender for favourable loan terms
- You can get a loan even if you have a low credit score
By pledging collateral, your business loan application can have a better chance of approval, which makes it a better alternative than an unsecured loan. However, considering your business, you must choose your collateral wisely. Make sure to evaluate your business loan eligibility before applying for a secured business loan to avoid any unnecessary risks.
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