Have you faced a situation when the lender asks for ‘security’? Scores of borrowers face the problem of collaterals when they approach banks for a business loan. Because banks are risk-averse, they will ask the borrower to furnish collateral against a loan for their business. In case there is any problem in repayment, the collateral is possessed by the lender. The collateral is just for the financial institution’s peace of mind.
If your bank or financial institution has already asked you to provide collateral, then here are the types of collateral that business lenders might want to secure your business loan:
Most lenders ask for real estate as collateral as property retains its value over time. But, not every business loan requires collateral. For instance, Tata Capital gives 100% collateral-free business loans ranging from Rs 5 lakh to Rs 50 lakh.
Do also remember that the process for a business loan with the collateral requirement is a long one because the lender will do an independent valuation of the property. If you go for an unsecured loan, there is no collateral requirement and the loan amount can reach you within just a few days.
Small business owners dealing in goods have inventory. Some lenders will give you a business loan if you produce inventory as security or collateral. The logic is that inventory is valuable for most businesses. So, if they hold this inventory as security, the business loan borrower will want to repay fast and take back the inventory.
Do note that your business loans lender won’t always deem your inventory equal to the value of your loan. They will mark down the value of your inventory i.e. take depreciation into account. So, if you are giving inventory worth Rs 10 lakh, the lender may ascribe a value of Rs 7 lakh. To assess your inventory’s current and projected worth, the might send a third-party auditor for valuation. This can take up precious time, especially if you are in a hurry to raise funds and close a big order.
With an unsecured business loan, there is no logic really in handing over your costly inventory. Take a collateral-free loan of up to Rs 50 lakh for 3 years at a fixed interest rate and rest in peace.
Many lenders seek funds that are lying in your bank account as collateral. You may argue that if you have cash, why would you require a business loan? The reason for this that many small business owners and entrepreneurs save cash for different requirements. A bundle of cash ensures that the lender will quickly and easily regain their losses if unfortunately somebody default on their business loan.
From the business loans borrower perspective, putting up your savings account is obviously high-risk. One small mistake and you could lose your entire savings or get your account frozen probably when you need cash to run the day to day operations.
A much easier alternative is to take a worry-free loan for business from a trusted financial institution like Tata Capital. There is no need whatsoever to put up any collateral like handing control of your savings account here. If you fulfil the business loan eligibility conditions, the loan is yours.