Collateral-Based Business Loans: What Assets Can You Use?

If you plan to get a business loan from an NBFC, you must understand the types of assets that can be used as collateral. A collateral-based loan is a type of loan in which borrowers can pledge their assets to seek financial funding. Selecting a leading NBFC to take a business-related loan is better, as it provides comprehensive and customized business loans. A borrower can apply for an instant business loan for up to 30 lakhs with less approval time. Along with it, let us also get a clear overview and insight into the benefits and limitations associated with the type of loan.

A Secured vs. Unsecured Loan: Understand the Difference?

An asset-based or secured loan uses collateral as its security. The asset of a business is any property that it owns and controls. The lender can take control of the collateral asset of a business in case of defaults. Lenders do this to ensure repayment of a loan on time.

In unsecured business loans, collateral is not required, and lenders usually consider factors like good payment history and active years in business to determine the amount of money to lend. Lenders cannot take any asset in unsecured loans.

Different Types of Assets You Can Use to Secure a Loan

Here are the different types of assets you can use to secure a loan:

• Real estate

  Properties retain their value over time, making them a preferred collateral option for lenders. Business owners can also qualify for higher loan amounts if they use their personal or business property as collateral.

• Business equipment

  Low-risk collateral option for manufacturing and construction companies, but depreciation over time can pose challenges, and finding a buyer may be difficult. Businesses should carefully assess the condition and marketability of their equipment before using it as collateral.

• Savings account

  Cash collateral is straightforward for lenders, but borrowers risk losing all their savings when using it as collateral for a loan.

• Inventory

  Your inventory can be used as collateral, but it may be difficult to sell and can harm revenue if defaulted on. Some lenders may not accept inventory as collateral due to these risks.

• Outstanding invoices

  Your outstanding invoices can provide quick cash, but fees and interest apply, and businesses still risk losing profits if clients pay late.

• Blanket lien

  Lenders have a legal claim on multiple assets, giving them protection, but borrowers risk losing everything and may have difficulty getting new loans in the future.

• Investments

  Collateralizing stocks and bonds can help borrowers repay creditors quickly, but market conditions can affect the investments' valuation, leading to difficulties if they lose value below the borrowed amount.

How to Choose Between Secured and Unsecured Loan?

When choosing between a secured and unsecured loan, several factors must be considered. Here are some things to keep in mind:

• Collateral:

  A secured loan requires collateral, like property or business equipment, while an unsecured loan does not require any collateral. If you have assets you're willing to put up, a secured loan may offer better rates and higher borrowing limits.

• Interest rates:

  Secured loans often have lower interest rates than unsecured ones because they offer lenders more security. However, unsecured loans can still offer competitive rates if you have good credit.

• Loan term:

  The loan term for a secured loan is typically longer than that of an unsecured loan because the lender has collateral to back up the loan. Unsecured loans typically have shorter repayment terms.

• Loan amount:

  Secured loans allow for higher loan amounts because of the collateral, while unsecured loans have lower borrowing limits.

• Risk tolerance:

  If you're risk-averse, an unsecured loan may be better since you won't have to put up collateral. However, if you're confident in your ability to repay the loan and have assets to put up a secured loan may offer better terms.

In summary, choosing between a secured and unsecured loan ultimately comes down to your personal financial situation, risk tolerance, and what you're willing to put up as collateral. Be sure to compare rates and terms before deciding on a loan.

Conclusion

Applying for a business loan can come with a lot of challenges. Selecting a leading NBFC to take a business-related loan is better, as it provides comprehensive and customized business loans. A borrower can apply for an instant business loan for up to 30 lakhs with less approval time. Online business loans are preferable as they require minimal paperwork. The interest rates of these loans are also attractive and cheaper, so repayment is not a big problem.