Before you can obtain a loan from the bank for your small business, the lender will scrutinise both you and your business to see if you are a viable borrower.
A bank will look at your company’s history, business credit, revenues, balance sheet, and your equity contribution. If you pass a credit check and you operate a healthy business, most banks will also require an additional and tangible guarantee that their loan will be repaid inthe form of collateral.
Collateral assets come in many forms. As defined by the Small Business Administration, collateral is “an additional form of security which can be used to assure a lender that you have a second source of loan repayment.”
Most commonly, collateral is real property (i.e. an owner-occupied home), but it can also be represented by your business’s inventory, cash savings or deposits, and equipment. In order to structure a loan that benefits both you and your business, you will need to make the right decision about what you offer up as collateral to the bank. It is also important to be realistic when considering the risks of defaulting on a loan, which could have harsh consequences for not only your business, but for your personal life too.
* Keep detailed records of your asset’s worth: Banks are notoriously conservative about valuing a borrower’s assets for collateral. After all, if the borrower does default, the lender must expend resources to take the asset, find a buyer, and sell it.
If you’re not sure of what your assets may be worth, it can be worthwhile to find an independent appraiser to give you an idea of how the bank will value your property.
* Know what you can use as collateral: Essentially, there are two different types of collateral: assets that you own, and assets that you still have a loan against. If you still have a loan on the asset, (e.g. a mortgage for a house), the bank will be able to recoup the loan by refinancing your loan from the institution you have the loan against, and claim the title.
A viable asset to use as collateral will have a title of ownership, and banks will only lend if they can get a title back. Homes and cars are the most common forms of collateral, but you can also use watercraft, motorcycles, as well as pieces of equipment that have a title of ownership.