Tips of Using Collaterals to Secure Loans
Almost every bank requests collaterals before giving loans to their clients. Here are some tips to help you secure loans using assets as collaterals.
The truth is- you need cash to develop your business. If you are looking forward to expanding your small business or even your large company, getting a loan is one of the best strategies. Before you get any funding from a financial institution, the lender will scrutinize your business to ascertain that you are a viable borrower.
The bank will check your company’s business credit, history, balance sheet, revenue and all other important financial activities. After you have passed all the credit checks, and they have confirmed your viability, they will still demand something extra – collateral. Collateral is a tangible and valuable asset that keeps you in check- so that you can pay your debt on time.
Collaterals assets are of many types. In most cases, collaterals are tangible expensive products or properties, e.g. a car, or home. Cash savings, business inventories, equipment, and deposits represent them.
To come up with a loan that benefits your business, you must make the right decision of what you want to use as collateral. You must also bear in mind that harsh consequences are likely to befall your business, if you fail to settle the borrowed loan. Such harsh penalties are not only detrimental to your business, but also affect your life. Below are the tips of using assets as collaterals, and the possible ways of handling crises, if any.
Understand the Value of Your Asset
The mistake commonly made by borrowers is they think their collateral is too worthy. They tend to forget that once you have purchased an asset, it immediately starts depreciating. As borrowers consider what they paid for the asset, banks consider today’s fair market, and collateral’s depreciation rate. If you are not sure of what your asset is worth, get a professional to help you estimate how banks will value your property. For simplicity, always keep detailed records of your assets on a balance sheet to help during price determination.
Use Collaterals with Titles of Ownership
Assets are of two types, depending on whether they are partially or fully owned. Fully owned assets are viable, and have titles of ownership. On the other hand, partially owned assets are still under a debt. Never use the assets as collaterals that you still have a loan against. Lending institutions can only give their money after they are sure that the asset is fully yours. Examples of common form of collaterals include homes, cars, motorcycles, watercraft, and equipment.
Understand the Risks Involved
You risk losing your asset once you use it as collaterals. Just as you are not pretty sure of repaying the borrowed loan, lenders also doubt your ability. Furthermore, you never know what may happen to your business. Most of those, who default paying their debt, do not do it intentionally. You are not an exception. Before using your asset as collateral, be ready to lose it.
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