If you’re a small business owner and you have exhausted all your financing options, you might feel like there’s nothing you can do. If you have lots of assets, however, you may have thought about putting some of it up as collateral. This could be a good option, but you first have to be aware of the consequences and the drawbacks of these types of loans. Let’s take a look at some of the benefits and disadvantages of collateral loans to see if they’re truly the right choice for you.
Pro – Allows You to Put Up Multiple Types of Assets
When people think of collateral, they usually think about equipment or real estate. But you can use many different types of collateral for your business loan. You can put up things like inventory, for instance, or even invoices. This means that you could be sitting on valuable collateral right now without knowing it.
Con – You No Longer Truly Own the Assets
You should know that a link between your property and the lender will be made immediately after you contracted the loan. This not only means that the lender can seize any property you put up, but also that you won’t be able to sell it if you need to raise some money.
Pro – They Often Have Better Interest Rates
Another benefit of these kinds of loans that you may not be aware of is that they often have lower APRs than your traditional loan. That’s because the collateral takes part of the risk away. This means that they don’t have to charge as much to cover for the possibility of default.
Con – The Application Process
One thing you should know about collateral loans is that you can’t expect the application process to go as smoothly as with other traditional loans. That’s because the lending company will have to verify that you truly have ownership of the assets. They will also have to go through an appraisal process, which can be lengthy depending on the nature of the assets. How long the whole process will take will vary and depends on the lender.
Pro – You Could Get More Money
One more reason why collateral loans can be a great option for any business is that they could allow you to access more money. Again, the lender now has a way to recoup any loss and might be able to take more risk. It also helps if you have a history with the lender.
Con – Only Available to People Who Own Property
If you’re one of those people who prefer to lease instead of owning, you might not have much collateral to offer. If you don’t own your car, home, or are renting your business space, then you might not be able to take advantage of these.
If you were still wondering if collateral loans were a good choice, we hope we were able to clarify a few things for you. They can be a great option depending on your assets and what you’re willing to give up, so they definitely deserve a second look.
