For the next instalment of our 5 C’s of credit series, we’ll be explaining Collateral in more detail. Read on to learn what this criterion is and how you can successfully meet its requirements when applying for a business loan.
What is Collateral when it comes to a loan?
Collateral refers to the ‘security’ a lender requires from you to protect the loan for repayment. In other words, it serves as a kind of back-up payment which the lender may claim if you fail to meet the terms of the loan. It is fulfilled through assets in your name – it may be a mixture of hard assets (i.e. property, cars, objects) and working capital (i.e. accounts receivable, inventory).
Let’s get into more detail on how Collateral’s assessed in a loan application
Ideally, your Collateral is equal to or greater than the loan you’re requesting which gives lenders full confidence they will not be at a loss under any circumstances. Many loans use the physical asset (building/plant and equipment/residential property) as security. For example, if Collateral were a car, and the failure to repay the loan would result in repossession. Business loans may also include personal assets as Collateral, such as your home or investment properties, your car or savings. There are many ways to protect your assets in a business structure, and it is best to seek professional legal or financial advice before doing so.
If you do not have the necessary Collateral for your loan, you may be eligible for a guarantor loan – a third-party’s assets are used as Collateral. For example, your family may provide their home as security for your business loan.
Providing evidence of Collateral
Proving your Collateral typically involves providing details of the assets and documentation showing they are in your name. Details may include the purchase date, current valuation and photos in some instances. If you apply for a guarantor loan, you will need the same evidence as above, but with the proof, they are assets of your third-party guarantor.
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