Assets that You Can Use to Get a Secured Business Loan

It is a proven fact that every business needs capital at various stages of its Life Cycle -right from its establishment to its growth, from its expansion to its diversification, and eventually for up-gradation. While some businesses may rely on cash inflow through savings, dividend-based earnings, or revenues, numerous others need external financial assistance. In the present-day scenario, this assistance is easily available in the form of Secured as well as Unsecured Business Loans.

As the names suggest, a Secured Business Loan requires the enterprise to pledge an asset in exchange for the loan amount, while to get an unsecured loan no such collateral is required. That being said, the latter attracts comparatively high-interest rates.

On the contrary, a secured business loan comes with a wide range of benefits. This is primarily due to the fact, which the risk proposition of the lender decreases considerably, as they have the leeway to fall back on the pledged asset in case of default on your end.

Some of the benefits of availing a secured business loan from one of the reputed lenders such as HDFC Business Loan are:

• Quick Processing Time
• Favourable Repayment Terms
• Increased Bargaining Power
• Reduced Dependence on Credit Score
• Lower Interest Rate

Now let us take a quick look at the types of assets that you can pledge in order to procure these quick, low-interest loans –

Property

One of the most common collaterals that individuals and businesses pledge in exchange for credit is property, which generally includes – Real Estate Assets and Home Equity. However, most people are often oblivious to the fact that other assets can also help them raise funds, including-

• Plant and Machinery
• Equipment
• Vehicles
• Valuables and Collectibles

When you put out a property as collateral, you can expect an LTV or Loan to Value Ratio of about 55 to 70%, i.e., you will be eligible to receive a loan amount of up to 70% of the market value of your property.

A crucial aspect to remember, especially when you offer real estate or your home equity as collateral is the fact that just in case you fail to repay the loan as directed by the lender, you stand a chance of losing the asset. This is because the lender has the right to seize and even sell off the property if you default on the loan, as a way to recoup their losses. Hence, before you go ahead and pledge your property, make sure you have a foolproof repayment plan in place.

Savings

If you have a substantial amount of money saved in your bank account or have a fixed deposit account, you can use the same as collateral for your loan. This type of loan is usually known as ‘Cash Loans’ or ‘Passbook Loans’, considering your bank account is on the line. 

While some may argue, that you should use your savings to fund your business, taking a loan against the same makes more sense. Not only does a Cash Loan ensure that your savings are not broken into, but it also offers you the motivation to repay the loan efficiently, which might not be the case had you used your savings. This way, at the end of the loan term, you have both, your savings as they were, and a business that is more efficient and profitable than before.

Besides, most lenders have a bias towards this loan, because in case of a default it is easy for them to recover the loss, without having to go through the gruelling process of putting up a real estate property or automobile for sale.

Of course, as in the case with property, you must have a reliable repayment strategy in place, lest you may lose out on your savings, in addition to hitting a new low on the credit report.

Business Inventory

In case you do not have any conventional asset to pledge for the loan amount, you can offer your inventory to the lender. In this situation, however, you must have a plan in place to sell off the inventory. If not, the lender may be hesitant to take it on, considering it is not in as much demand, and they may be rendered unable to recoup the losses. Hence, you should tread the waters very carefully, else your loan application may get turned down.

Accounts Receivable

Many a time, you receive a large order but are unable to process it due to the lack of funds required to meet the demand. In such cases, you can choose to offer the ‘Purchase Order’ as your collateral for a secured business loan. Here, the lender may ask you for an explanation regarding your plan to use and repay the funds.

Then again, if you have one or more unpaid invoices, you can also use them as your collateral. In this case, you may expect to get up to 85% of the invoice amount as a loan. When the customer clears the invoice, the lender withholds the remaining 15% of the payment until you repay the loan in full. In this case, the onus of retrieving the invoice amount from the customer lies with the bank. In case of non-payment from the customer, it will be your liability to repay the loan in full. What works in your favour is the fact that none of your assets will be taken over by the lender.