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Here’s What You Need to Know About Financial Collateral

  • Financing|
Published: 10/02/2018

It seems like everyone is starting a business these days. Entrepreneurs everywhere are coming up with the next big thing or making an already great thing even better. If you’re looking to start a business, but are having trouble getting the capital and financing you need, you’re not alone. Entrepreneurs’ requests for a loan can be rejected for a number of reasons.

Luckily, there is more than one way to get the financing necessary to get your business up and running. One fairly simple way to get a loan to start your business is by using collateral. Financing with collateral can help you get the loan you need, even if you might not have qualified without it.

How It Works

Collateral is used as a way to assure lenders they will be able to recoup at least some of the money they are lending you if you can’t pay back the loan. Collateral is used as a safeguard to protect lenders from losing all their money and to protect you from being sued if you miss a few payments or default on the loan. When you take out a loan, you can offer an asset as collateral to back the loan you are requesting.

If your lender agrees to the collateral, your asset(s) will be appraised and the terms of your loan will be determined based on what you need, what you have to offer, and any other relevant details you may have discussed with your lender.

What You Can Use

There are a number of different things that can be used as collateral when getting financing. Some of the types of collateral that can be used include:

Vehicles – Whether it be a boat, car, RV, motorcycle, or other type of vehicle, you can often use it as collateral to back your loan. Keep in mind, though, that old “A to B” cars don’t appraise as high as newer cars, so you may not be able to use your vehicle as collateral for the loan. If you have a classic car you’ve restored, it may appraise much higher than a regular commuter vehicle, but you may not want to part with it in the case anything goes awry. Be sure to consider the consequences carefully before deciding what, if any, vehicle to use for collateral.

Machinery – Similar to vehicles, machinery like backhoes, Bobcats, and many other different types of equipment can be used as collateral for a loan. If it’s something you don’t use much anymore with a fairly high value, it may be the perfect item to use as your collateral. If it’s something you’ll be needing in order to run your business, it may not be the best option you put up for financial collateral.

Real estate – Whether it’s your personal home or a piece of property you own in another state or country, real estate can be used as financial collateral to secure your loan. If you have more than one piece of real estate, you may want to consider putting up an empty lot or rental home as collateral instead of the home you live in to ensure you can keep a roof over your head, in case there is any trouble and you can’t make payments on your loan.

Collectibles and valuables – Different collectibles and valuables hold different meaning to different people, so while you might think a collectible lunchbox is the most valuable possession you have, the lender will likely prefer any silver and gold jewelry instead. Your collateral options aren’t just limited to silver and gold, though. Things like guitars, antique pottery, and paintings may also be used as collateral if they are appraised at a high enough price.

Payments from customers – Interestingly enough, another form of collateral you can use is future payments from customers. Although hypothetical future payments from (hopeful) future customers may not be acceptable to your lender, if you already have orders on the books, it may be good enough for your lender to use as collateral to back your loan.

The Benefits

Financing with collateral can be beneficial in many ways. It may help with loan approval and help you build your credit. It could also allow you to get a lower interest rate, which would save you money in the long-run and make your monthly payments lower.

Things to Be Aware of

Although financing with collateral can be beneficial, it’s also important to keep in mind the downfalls and dangers collateral loans present. Although collateral loans may have a lower interest rate and help with approval, putting up your home, car, or collectibles as collateral means you could lose them entirely if something were to happen.

Be careful about what you choose to use as collateral and consider whether or not you could part with it if the loan fell through. Do you think the benefits outweigh the risks? If you’ve taken out a collateral loan in the past, what advice do you have for those looking into it?

If you’re looking for loan collateral options for a new business, contact the team at Currency Capital for guidance today.

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