What Is Collateral for Business Loans ? | Features & Types (2024)

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What Is Business Collateral?

Abusiness collateralis an asset that any business puts up as security for availing of a loan. Mosttraditional lenders require collateral for a business loan, specifically when the loan amount is high and per the applicant’s financial capabilities. Loans secured in this manner are secured loans and come with lower interest rates than unsecured business loans.

Business loan collateral can be anything, from real estate & constructed properties to machinery, equipment, stocks & inventory, or even non-physical assets such as cash, outstanding invoices, or accounts receivable. If the business fails to repay the loan, the lender gains the legal right to seize the collateral and sell it to curb its losses.

What is Collateral?

A collateral is a security measure that helps lenders manage their losses in case of any loan default. Loans secured by collateral are also known as asset-backed loans or secured loans, and come with lower interest rates thanunsecured loans.

All securedbusiness loans requirecollateral, irrespective of the type of business applying for it. At the same time,many traditional lenderscan also ask for collateral from small business owners to secure a loan. However, there are cases wherelendersallow businesses to avail of secured loan schemes without pledging any security based onbusiness credit profileorbusiness owner’s creditworthiness, albeit at a high-interestrate.

Assets to be put up as proposed collateral must be thebusiness’s propertyor the business owner’s or applicant’spersonal assets. Any collateral must have a high loan-to-value ratio and be as tangible or close to cash as possible. It must not have been pledged against any otherbusiness loansor have any other claims against it.

Features and Benefits Of Secured Business Loans At Yubi

At Yubi, businesses can avail of a wide assortment of secured business loans from more than 750 leading & banking institutions across India.

1. Superb Perks: Avail of lower interest rates, longer repayment tenures, faster approvals, and quick disbursal.
2. Borrow Loans Of Rs. 50 Lakhs & Above: Meet the collateral requirements and avail of numerous collateral-based loan schemes ranging from Rs. 50 lakhs to Rs. 20 crores. Collateral depends upon loan amount, business loan requirements, cash flow, credit score, and credit history.
3. Personalised Deals: Connect with leading lending institutions across India through our unified corporate debt platform, tell them about your business needs, and get favourable loan terms & personalised deals tailored to your requirements.
4. Easy Repayment: Yubi automates the entire loan process end-to-end. From connecting to onboarding, disbursal, and payment, everything’s lucid & accessible. So choose a suitable loan scheme and lender for your business and avail convenient repayment tenures of 1 to 10 years.
5. A Complete Digital Lending Tool: Yubi is India’s leading digital corporate debt platform. Advanced AI automation technologies and API-backed infrastructure offer an integrated solution to the entire business lending life cycle.

How Collateral Works with Business Loans?

When a business applies for a loan, the lender looks closely at the business’s financials, credit history & score, cash flow, and other essentials. It then decides the most appropriate loan scheme for the applicant. Such schemes may either be secured or unsecured.

If a business intends to secure its borrowed funds with collateral, the lender determines the nature of specific assets as collateral for the business loan. For example, personal property, residential property, office equipment, machinery, real estate, or even the assets purchased using the business loan can be considered sufficient business collateral.

During the sanctioning or approval process, applicants must sign a lien agreement with the lender. This gives lenders the right to confiscate the collateral unless all debt obligations have been cleared. Most lenders also require a personal guarantee as additional collateral if the applicant is a small business owner with bad credit history and a considerable loan amount.

What Types of Business Financing Require Collateral?

Secured business loans, mortgage loans, warehouse lending, and MSME loans above Rs. 200 lakhs (Rs. 100 lakhs) require collateral. The nature of collateral needed depends upon loan amount, business credit score, financials, and industry.

The Different Types of Collateral You Can Use for Business Loans

Business loans with collateral are an excellent way for MSMEs to get quick financing. They can sanction more significant funds and enjoy a lower interest rate if the potential borrower pledges offer assets of reasonable market value.

A few prominent types of assets accepted in traditionally collateralised loan schemes are:

• Real estate: One of the most popular and widely-accepted collateral for business loans, appraised real estate has a high loan-to-value ratio and retains said value over a long period. As a result, business or personal assets are good collateral and can enable applicants to avail substantial funds at lower interest rates.
• Vehicles: Vehicles are another popular type of collateral. Work and personal vehicles can be put up as security for a loan; if the loan is for buying a vehicle, it automatically qualifies as collateral.
• Equipment: Equipment, machinery, and similarbusiness assetscan be pledged as collateral. The current market value, age, and condition of the equipment are influencing factors as these assets depreciate. The purchased property can also be used as collateral while availing of the loan.
• Inventory: During lean periods, businesses may have a lot of capital stuck in their inventories. Such stocks and inventories can be used as collateral for unsecured business loans. Also known as inventory financing, the market value of the goods & inventory used as specific collateral is a crucial factor.
• Accounts receivable: Lenders can use the payments receivables of outstanding invoices to recover losses if the business defaults.
• Savings: Cash in a business’s savings account can be great collateral for a loan.
• Personal guarantee: A personal guarantee is necessary if lenders decide some additional security is essential. In addition, in case of loan default, personal guarantors must take personal responsibility, as lenders can seize their assets if the existing collateral does not cover sunk costs.

Eligibility Criteria and Documents Required

The generic eligibility criteria and loan documents necessary for unsecured business loans are:

• 20 to 65 years at the time of maturity
• Minimum business vintage of 3 years
• A minimum business credit score of 700or higher
• Business incorporation documents
• Trade license
• Business establishment certificates
• Audited balance sheets, profit and loss statements
• Last six months of bank statements
• GST returns and income tax filings
• Proof of business ownership, such as a copy of the partnership deed,
• Applicant must be self-employed and be with the business for at least three years.

Additional documents may be necessary, and eligibility criteria differ from one lender to another.

Interest Rate and Fees Applicable

Interest rates are lower than an unsecured business loan. Rates differ across different lenders and lie in the range of 10% to 26%. Processing fees also vary between 1% to 3% of the sanctioned loan amount, and there may be prepayment or foreclosure charges in the range of 4 to 6% on the loan amount.

Collateral Ratios by Financing Type

Here are the collateral ratios for different loan financing types:

• For business lines of credit, 90% of the collateral value
• For payments receivables financing, 80% of the collateral value
• For commercial real estate & equipment loans, 75% of the collateral value
• For inventory financing, 50% of the collateral value

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