A bank or a financial institution will look at your company’s history, business credit, revenues and balance sheet. If you pass the credit check, they will also require an additional guarantee that their loan will be repaid: Collateral.
What is Collateral
Collateral refers to a piece of property (usually physical) that a would-be borrower pledges to a lender in order to help secure a loan. It establishes you as a good borrower to financial institutions and opens more avenues to apply for a business loan. Loans against a collateral is usually a percentage of the estimated market value of the pledged collateral.
Here are some tips for increasing your chances of securing business loan using collateral
Know the Current worth of Your Assets
One of the most common mistakes made by business owners is over-estimating the current market-value of their assets. You can hire the services of independent professionals to get an idea of the market-value of your assets.
Be Aware of the Assets That Can be Used as a Collateral
Among all the assets that you possess, some might have a loan against them. In such cases, the financial institution can refinance your loan. Houses and vehicles are most common types of collateral used by people. Some assets that can be used as collateral are:
- Cars or Motorcycles
Take Calculated Risks
It is important that you understand the risks of using your assets as a collateral. In case you miss your payment, you stand a chance of losing your asset which has been pledged as a collateral. A financial advisor might help you to understand the implications of the risks involved and ways of successfully repaying the loan.
Negotiate and then Negotiate Some More
As a business owner, you must always be aware of your credibility and the worth of your assets. Businesses need regular capital and the requirement of a loan can arise anytime. If you have borrowed earlier and have a demonstrable history of a good business credit, then you can get a loan with terms that you are comfortable with. Once you know that financial institutions will be keen to offer you a loan: negotiate.
While collateral based loans have a lesser interest rate, they carry a risk to your asset in the event of non-repayment of the loan. Unsecured loans, on the other hand have a higher interest rate but your assets are safe. Choose wisely and be prudent; never hesitate to seek professional advice.
You can apply for a Loan against Property with Bajaj Finserv. Use our Business Loan EMI calculator to work out your finance needs.