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How Collateral Works in Business Loan?

It is essential to make sure that you are able to repay the loan before you look for a lender. If you apply for an unsecured business loan, then the form of security that the individual or the business can offer is the collateral. If you are applying for a business loan in Chennai then collateral acts as a form of protection that protects the lender from potential damages in case if the borrower fails to return the money. The advantage of applying for a business loan with collateral are

  • Greater the chance of qualifying for a loan
  • Greater number of options for loan
  • Payment terms are better
  • The interest rate is much lower

The type of collateral varies from business to business be it a small business finance company or large and from individual to individual. It can be real estate, cash secured loan, inventory financing invoice collateral or blanket liens.

It is essential to determine the collateral to be submitted to the finance in order to benefit the individual as well as the business. If you use the viable assets as collateral, the bank will offer a loan only if the title is retained. For those assets that have a pending loan against, you can use them as collateral through refinancing.

However, the borrower should be aware of the risk of using the asset as collateral in case if you default on the loan. Collateral can also be used to show that the borrower cannot be considered a high-risk borrower. When the borrower offers the collateral, it also reduces the interest rate and thus one is offered an affordable business loan. With collateral, you can even avail up to higher loan amounts that may even not be possible with other loan types. However, the borrower is compelled to repay the loan in time for the fear of losing the collateral. Collateral is very much essential if your credit history is poor or if your CIBIL score is low.

A collateralized personal loan is another type of borrowing where an item of value is offered as collateral by the borrower. The amount of collateral offered should be on par with the amount of loan availed. Hence, it is advisable to choose the financial institution you are familiar with if you thought of seeking a collateralized personal loan.

The collateral loan can be residential mortgages, home equity loans or margin trading.