Collateral Business Loans 101
Lesson #1: What is Collateral?
Collateral refers to tangible assets (like equipment and buildings) and intangible assets (like cash and securities) that borrowers use to obtain a secured business loan. Depending on the loan agreement, collateral can be comprised of business assets, personal assets, or often a mix of both.
Lesson #2: Who Determines and Pays for Collateral Valuation?
The lender determines collateral valuation, and it is paid for by the borrower as an up-front cost. The process can be contentious and controversial, because many lenders — and especially banks — are notorious for under-valuing collateral.
For example, a piece of industrial equipment that is clearly worth $100,000 may be valued for collateral purposes at $75,000 — or even lower. Why do lenders lean towards undervaluation. Because it further reduces their risk, since it means borrowers must pledge even more collateral to secure the loan.
Lesson #3: What Happens to Collateral if Loan Payments are Missed?
In the event of a missed payment, lenders reserve the right to immediately take possession of collateral and liquidate it accordingly to recover the debt. To make this process faster and less costly, some lenders insist on collateral in cash, or other easy-to-liquidate asset(s) like stocks, bonds, precious metals, etc.
Lesson #4: Are There Business Loans That Don’t Require Collateral?
Yes! There are a variety of business loans that do not require any collateral at all. They’re called unsecured business loans, and they’re very easy to get! Unsecured business loans do not require any collateral at all, whereas secured business loans do. Here are a few examples:
- Unsecured Small Business Loans: Flexible or fixed terms, short and long-term options. Unsecured business loans work just like regular business loans, but don’t require any collateral, and can be even more cost-effective with more accommodating terms. These loans otherwise work identically to regular small business loans, with term lengths spanning anywhere from 6 months to 10 years, and loan amounts ranging from $10k to $5mil, depending on the needs of your business. Although there are NO credit score minimums required to get approved for an unsecured business loan, you do need to be making $100k in annual sales.
- Unsecured Business Lines of Credit: Not technically a loan per-say, but similar in that you are given capital that you pay back over time. The difference between an unsecured credit line and a secured business loan is that you only pay back what you use, with no business, personal or real estate collateral requirements necessary–along with a revolving credit line from which you can decide exactly when and how much you need to draw out. You can then put the capital drawn back into your credit line, making it immediately available to draw from once again!
- Equipment Financing: Use the equipment itself as collateral, NOT your own assets. So there’s no reason to worry over losing your own assets in case of foreclosure. To add to this, all you need is a minimum FICO of 625, OR an annual revenue of $125,000 to qualify. That’s one or the other-not both! Business owners typically get funding for new equipment in 24-48 hours after applying.
- Cash Advances: Leverage a portion of your customers’ sales as collateral, instead of your own capital. This means no collateral leveraging on your end. Instead, all that’s leveraged is the sales of your customers – instead of cash from your own wallet. No time in business, FICO or annual revenue apply to getting approved for a merchant cash advance, making it an exceedingly popular choice among small business owners that make sales primarily from credit and debit-run industries.
These are all financing options that are popular with business owners that do not wish to put their personal or business assets at risk in case of default.
Naturally, borrowers must commit to paying back their loan in full and on time. However, they are not at-risk of having their pledged assets (since there are none) taken over and liquidated by lenders. For business owners, peace of mind is not just valuable, but vital in keeping operations running smoothly, and reducing risk of losing valued assets.
Lesson #5: Can You Qualify for Secured Business Loans with Bad Credit?
Yes! NBC approves 90%+ of all business owners who apply for collateral business loans–and unsecured business loans as well–regardless of their credit score and extensive financial history. That isn’t something you see every day, and it’s something you certainly won’t find through banks or any other kind of traditional lender.\
Advantages of Leveraging Collateral for Business Loans
While unsecured business loans may reduce risk for business owners, they increase risk for banks and lenders to give capital to borrowers. Without any backing at all in case of a borrower’s foreclosure, lenders are more hesitant to give options with terms as agreeable as their secured counterparts. This often results in offering business financing options with worse terms than they’d get if they offered some form of collateral.
That being said, the advantages of leveraging assets are obvious: larger offers, longer terms, and lower rates… at least with most banks and lenders. That’s where we come in!
While it’s true that you have a greater chance of getting business loans with the underwriting you’re after through leveraging collateral, that doesn’t mean that you can’t also get the perfect funding option for you without doing so at NBC! No matter what your funding needs may be, and how much or how little collateral you’re willing to leverage, NBC finds the perfect financing for their customers, no matter the odds.
How to Get Unsecured or Secured Business Loans
Simply call (877) 482-3008 to speak with a member of our team, or fill out our simple 1-minute application online to get the ball rolling, and receive secured or unsecured business loan of your choice in as little as 24 hours!
We are excited to learn about your business financing needs and goals, help you understand the details of our unsecured loan products (we offer several), and answer all of your questions clearly, honestly, and without any confusing jargon.