The ebb and flow of modern business is difficult to predict. Small businesses, in particular, can struggle to react to fast-changing market conditions. There may be times when short-term cash injections are needed to cover temporary cash flow problems or capitalize on opportunities for expansion. And at times like these, collateral loans are very useful financing options.
Whether you need funds to expand your business or simply to cover a temporary cash shortage, collateral loans could be the answer. But to ensure you choose the right product, you need to know exactly what you’re dealing with.
Collateral loans defined:
Collateral is an asset used by a lender as security for a loan. While there are unsecured loans available, collateral loans tend to offer lower rates – thanks to the reduced risk the lender faces.
Most traditional lenders require at least one asset as collateral. This might be property (such as pieces of equipment), shares in a business, future profits, or unpaid invoices. How much collateral is needed depends on a range of factors, including the loan amount, the term, the purpose of the loan, and the business’s credit history.
Does a collateral business loan make sense for me?
Applying for a collateral business loan makes sense if your business is viable over the long-term. If you’re borrowing money against assets in order to delay the inevitable, a collateral loan might not be the best answer for your business. But if your business has strong assets and a demonstrably bright future, a loan secured against collateral could be the right choice.
What type of collateral is required for secured collateral loans?
When you take out a collateral loan, you’re making a legal commitment to repay it according to the agreed schedule. If you fall seriously behind with your repayments, the lender can sell off your secured assets to recoup the outstanding balance on the loan.
As long as your collateral has significant value, there’s a chance your loan provider will consider it for a secured loan. The most common forms of collateral are:
Real estate
You can secure a loan against commercial property. Some lenders will also lend against the equity your business holds in a property (the difference between your real estate loan balance and the property’s current market value).
Cash
You can secure a collateral loan against a business bank account. Lenders have the option of liquidating the business bank account if you fail to stick to the payments. But because this type of loan can reduce the risk to the lender, you’re likely to find favorable terms.
Equipment
If your business owns equipment with significant resale value, your lender may accept it as collateral. In most cases, high-value equipment (such as factory-based machinery) secures favorable rates and longer repayment schedules.
Inventory items
If your business keeps an inventory of stock, you might be able to use it as collateral. However 
, your inventory needs to be of reasonably high value.
Invoices
If you run a business that always holds a lot of unpaid invoices, you can use them as collateral. An unpaid invoice represents future income. If you fail to repay your loan, however, the lender will collect the monies owed when the secured invoices are paid.
Blanket liens
This type of collateral loan gives the lender the opportunity to use all viable assets owned by a business as collateral.
A personal guarantee
A personal guarantee gives your lender the right to seize any personal assets you personally own now or in the future in order to satisfy the outstanding business debt.