A collateral loan is also known as a secured business loan as it carries some form of guarantee. Borrowers put down something of value or assets to secure the loan. This protects the lender from losing any money. If you default, the lender can then seize your assets and sell them to get the owed money.
Types of Collateral
Some forms of collateral include:
- Real Estate
- Equipment
- Inventory
- Borrowers can pledge miscellaneous items of value like jewelry
These act as a form of security on loans. By offering these items as a form of protection, collateral loans tend to have lower interest rates. If you have a low credit score or haven’t been in business very long, a collateral loan might be your best option in terms of loans.
Example of a Collateral Loan
Have you ever bought a car or a house? A mortgage is a form of a collateral loan with the property itself acting as the collateral. So if you, the homeowner, fail to pay, the lender can foreclose on the home. Auto loans work similarly.
How Does a Collateral Loan Work?
Before you are approved for a collateral loan, a lender must determine the value of the collateral you are putting up. For example, when real estate is involved, they will get an appraisal of the property and figure out its fair market value. In coming up with the loan amount, the lender will offer a percentage of the collateral’s total value. This value is reflected in the loan-to-value ratio or LTV associated with the loan. The higher the LTV, generally, the more interest you will pay. Additionally, you may need a more significant down payment depending on loan terms.
Where Can You Apply for a Business Collateral Loan?
You can apply through a traditional bank. However, bank loans can take a bit of time as the application process is not as fast as you’d get with an online lender. Online lenders are another excellent resource for collateral loans. And with many such lenders, they can get you the funds rather quickly; in certain circumstances, it could be a matter of a couple of days.
Understanding your business and the types of loans available is the key to getting the proper funding. If you need help finding the perfect loan option, First Union Lending can help!
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First Union Lending offers numerous financing programs designed with small businesses in mind. Our business loans are fast and flexible, with financing options ranging from $5,000 to $2 million.
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