Four tips to secure a loan with collateral

When it comes to securing a loan for your small business it's natural for a bank to request collateral to help secure their investment. When reviewing your credit application a bank will look at your credit report, business history and accounting documents to determine how likely they are to have their loan repaid.

Although using assets as collateral can be risky, it reassures the bank of their investment and increases the chances of your application being approved by a potential lender.

Collateral comes in many shapes and forms, but how can you use it to your advantage in a credit application? Below we've detailed four tips to help outline how you can use your assets to help confirm your next credit application.

Keep track of your asset's worth

Banks will want to know the current value of the assets you intend to offer as collateral. It's important to remember that your assets will depreciate over time. For example, just because you paid $60,000 for your delivery van five years ago, doesn't mean it will be worth the same value to a bank today. In order to improve your chances of securing a loan it's a good idea to keep a consistent record of financial or accounting documents that details the value of your asset over time.

Know what can be used as collateral

There are two different types of collateral you can use to secure a loan: the assets you own, and the assets you still have a loan against. In the instance you still have a loan on the asset the bank who approves your credit application can recoup the original loan and take control of the asset title. Generally speaking a viable option for banks is to use an asset that has an ownership title so banks can secure the title in the instance you fail to repay your loan.

Be wary of the risks

It's important that you understand the risk of using collateral before committing to a loan. Remember that by using personal assets to secure a loan you concede the possibility of losing the asset in the event you can't meet the loan obligations. Always try to be realistic of your company's needs and if you're unsure it's a good idea to consult a financial advisor to determine the risks attached with the loan.

Try and negotiate

For some small business owners offering collateral to secure a loan will be a last resort due to constant application denials and there will be little room to negotiate as a result. However, if your business has a good credit history it's a good idea to try and negotiate terms that work for you.

Remember, you are never obligated to take a lender's offer and can always seek a different bank if the terms aren't what you were looking for.

Are you still struggling to secure a loan? These articles have more information on how you can finance your business:

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