Capital allows for inventory purchases, staff salaries, modern equipment, advertising and so much more.
At some point in the lifespan of your company, you will probably need a loan.
One of the ways to get the capital you need is through the Small Business Administration which encourages other lending institutions to fund small businesses.
Once you look into SBA lending as a possible vehicle for the funds you need, you will soon notice that many of these loans require collateral.
Before you go any further in the process, it’s vital that you understand what collateral is, what types there are and whether it’s always necessary.
What Is Collateral?
When someone is considering lending you money, their first concern is probably whether you are a good investment risk.
Think of collateral as a way for the lender to be sure that you will honor your end of the financial deal.
With certain lenders, like Lendistry, SBA collateral requirements are more flexible because a portion of the loan is guaranteed.
If you are unable to repay the loan for whatever reason, the lender may want a secondary source of cash that he or she can draw from.
In the case of SBA lending, collateral can be your real estate, equipment, inventory and accounts receivable.
Even your own personal assets can become a target.
Many SBA loans are made available by private lenders.
If you decide to go with one of these, it’s very likely that you will be subject to an All Business Assets (ABA) Lien.
In other words, your collateral will consist of everything your business owns.
Your primary collateral is generally whatever you purchased with loan funds.
However, this is not often valuable enough, which is why other assets must be pledged.
Do You Always Need Collateral?
If you are just starting out or have a low credit score, you may not have adequate collateral to be considered for some SBA lending vehicles.
Fortunately, that doesn’t mean that you are locked out of the opportunities that a loan can furnish.
With SBA’s 7(a) option, financing is guaranteed for a number of general business purposes.
Both start-ups and small businesses already in operation can apply.
Certain SBA 7(a) loans include export loan programs, express programs, rural lender advantage programs and a special purpose loans program.
As an entrepreneur, it is definitely to your advantage to do your research on these various lending vehicles to see which would best meet the needs of your business.
If you do decide to apply for a loan that requires collateral, take these steps to minimize the chances of defaulting on your loan:
Know the real worth of your assets.
Keep detailed records of all of them, and consider having them appraised by an objective third party.
Understand what can be used as collateral.
Anything with a title of ownership can be used. Cars and property are the most common examples. However, since the housing bubble burst, equity in property is greatly reduced.
You can also borrow against your inventory and accounts receivable financing as well as your own personal savings.
Understand the risks of taking out a loan.
Discuss the risks with a qualified financial adviser and any other parties who might be affected (like your family.)
Don’t be afraid to negotiate with lenders.
Be sure your lender is not engaging in predatory lending practices that will charge you exorbitant rates.
The best way to ensure you get a good rate on your small business loan is by comparing offers from multiple lenders. Let them know that you know what else is out there.
Make them compete for your business – that’s the LendGenius method.
Consider alternative financing.
Vehicles such as peer-to-peer lending are rapidly becoming popular with small business owners who lack collateral.
Although loan amounts are smaller (generally under $25,000) there is significantly less red tape and collateral needed.
If your business needs money for start-up or expansion, today’s lending environment is much more flexible than in the past.
No longer are traditional banks the only players in the field.
Take time to understand your ability to furnish collateral and you can obtain the loan that works best for your business’s unique needs.