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Every small business will need an infusion of cash at some point. When the need arises, a business loan with a traditional lender generally has the best interest rates and loan terms. It also requires more from borrowers though, including some form of collateral.

The bank will examine your business credit as well as your revenue and your company’s financial history. If the lender determines you have enough income to repay the loan, the bank will also ask you to provide collateral – a secondary source of repayment. This could be either a physical asset you own or your accounts receivable. In terms of physical assets, the lender will want a piece of property that has a title of ownership, including things like business real estate, personal houses, cars, business equipment, even boats and motorcycles. The key to offering any of these items as collateral is having enough equity in them. If you still owe 90 percent of your home’s value to your mortgage company, your business lender would not be able to recoup much of her losses from the house if you default on your loan. Banks will only accept assets in which you have a sizable amount of equity.

If you hope to use your accounts receivable for collateral on a business loan, you will need to provide detailed records of what is owed you. You may also be able to use current, large purchase orders for collateral if you need the loan money to fill the order.

Once you decide what form of collateral the bank will accept, you need to know how much it is worth. The bank will probably value your equipment or car or inventory much lower than you do. They have to take into account the cost to them of repossessing and selling it. You can be prepared for the lender’s estimation by hiring an independent appraiser to assess the worth of your collateral ahead of time.

Providing collateral for a business loan is very important to securing the best loan terms, but it can also be risky. Make sure that life could go on financially for you without that collateral if you had to default on your loan for some reason.


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