Are you considering applying for a business loan? You may need to provide collateral to secure the loan. Here’s everything you need to know about business loans with collateral.
What Is a Business Loan With Collateral?
A business loan with collateral is a loan in which the borrower pledges assets as security for the loan. If the borrower can’t repay the loan, the lender can seize the assets to recoup its losses. The most common type of collateral for a business loan is real estate, such as a commercial building or land. Other types of collateral can include equipment, inventory, and accounts receivable.
Why Would I Need To Provide Collateral for a Business Loan?
There are a few reasons you might need to provide collateral for a business loan.
Some Loan Types Require It
For some types of loans, such as SBA-backed loans, collateral is required to borrow $350,000 or more. Other loans, such as working capital loans, may not require collateral but may offer lower interest rates if you provide it.
It Helps You Qualify for a Loan
For borrowers without solid credit history or much revenue, providing collateral can help you qualify for a loan. Collateral gives lenders something to seize if you can’t repay the loan, which makes them more likely to approve your application in the first place.
It Can Help You Qualify for a Lower Interest Rate
If you have strong business credit and revenue, providing collateral may help you get a lower interest rate. The lender is taking on less risk by lending to you and can pass along some of that savings to you at a lower interest rate.
How Do I Know If I Can Get a Business Loan With Collateral?
You’ll need to apply for a secured loan to get a business loan with collateral. Secured loans, or asset-backed loans, are financing backed by collateral like asset-backed real estate or equipment.
You can use the Business Loan Wizard from the SBA to see if you’re eligible for an SBA-backed loan. You can also check with a bank, credit union, or private financing company for more options on business loans with collateral.
What Happens If I Can’t Repay the Loan?
If you can’t repay the loan, the lender has a few options.
The Lender Can Seize the Collateral
If you don’t repay the loan, the lender can seize the assets you pledged as collateral. The seizure process varies by state, but the lender will send you a notice of default and then auction off your assets to the highest bidder.
The Lender Can Sue You
The lender can also sue you for repayment. If the lender wins the lawsuit, the court may order to pay the entire loan, plus interest and court costs.
The Lender Can Shut Down Your Business
If you still can’t repay the loan, the lender may decide to shut down your business. This is a last resort for the lender and usually happens if the company can’t repay the loan and the collateral is not enough to cover the loan amount.
The Bottom Line
It’s essential to understand the terms of your loan agreement before taking out a business loan with collateral. Be sure to consult with an attorney or financial advisor to ensure you are getting the best deal for your business.
Alton Clarke was born and raised in Syracuse. He has written for MSNBC, The Business Insider and Passport Magazine. In regards to academics, Alton earned a degree from St. John’s University. Alton covers entertainment and culture stories here at Diving daily.