How to Use Business Assets as Collateral for a Loan

Posted by Factor Funding Co. on May 14, 2013

Have you been considering using your assets to secure funding for your business? If so, you'll need to be careful as you go through the process. Signing up for the wrong financing plan can endanger your valuable company assets and even your company. Here are few tips to keep in mind about using your business assets as collateral.

1. Find out the real value of your assets.

First, it's essential to get a comprehensive valuation of your existing assets, particularly the ones you are considering using as collateral. Doing this will help you know the true worth of your property, rather than simply accepting whatever valuation the lending institution assigns to the asset. Often, a bank will underestimate the worth to avoid giving you a larger loan, so do your homework in advance to avoid getting shortchanged.

2. Carefully weigh the risks versus benefits.

Small business owners can use asset-based lending to grow their business. However, the arrangement can also result in serious risk, especially if you're not careful about the lending terms. One of the biggest benefits of asset-based lending is that you can get approved for your loan without having to pass an intensive credit check. Since so many entrepreneurs have insufficient business credit, this alone can be the driving motivation for signing up for the arrangement. But, if you decide to offer up your ownership of a critical business asset, your entire company could come to a standstill if you're unable to continue making payments on the loan. It's generally best to offer up an asset that has value but that you could operate without if you had to default on the loan.

3. Double-check the loan terms about what you can use for collateral.

No matter how much your primary asset may be worth, it's useless to you in this situation if the lending institution won't accept it as collateral. Some banks are particular about which kinds of assets they're willing to use as a basis for granting a loan, so inquire about the accepted forms of collateral before you go forward with your plans. This will give you time to think about alternative ways of getting funded if you're unable to go through with the loan.

Asset-based lending can be a huge form of assistance for new or struggling business owners. Making common asset-based lending mistakes, though, can put your company's entire future in jeopardy. If you use these asset-based lending tips, you may be able to avoid those same pitfalls.

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