A startup often requires financial support to operate and make payments. Opting for a small funding option puts the business profits, reputation, and credit at risk. A secured loan also puts collaterals at risk. However, startups have the option of choosing security.
The four types of securities a business can offer include real estate, equipment, inventory, and invoices. But each of these collaterals comes with benefits and drawbacks if the organization chooses to take either unsecured quick loans or secured loan.
Collaterals for a Startup to Get a Secured Loan
● Real Estate
Most entrepreneurs find real estate as one of the most suitable collaterals against a secured loan. On the other hand, lenders also consider it valuable because it is an attractive mode of financial stability.
The most significant advantage of putting real estate as security for the loan is that the cost of the property is relatively high. Therefore, borrowers can avail large amounts of money. Unfortunately, it is also a risk choice against a loan.
For example, the inability to comply with the loan terms and conditions, or making continuous repayments can lead to loss of the home. Moreover, taking a loan against a real estate becomes riskier, if it is a business office.
Choosing unsecured loans for bad credit would prove much more beneficial, even though they might come at high-interest rates. At least, the place of business or residence or both would always remain secure.
The second option to getting a secured loan is providing equipment as collateral. Although it might seem as the easiest method, it isn’t. Lenders consider the value of the equipment before taking it as a security.
For example, a computer or hardware become obsolete quicker than heavy machinery. Therefore, the value of such devices decreases overtime. Similarly, the value of heavy machinery may be high in the market, but finding a buyer for it could become challenging.
Any equipment becomes excellent security against a loan if the borrower amount is considerably low. However, before deciding to put the equipment as security borrowers must evaluate its importance to the business. Estimating this would help to decide the right kind of equipment for the loan.
Loan lenders often accept inventory in the form of collateral. Lenders mostly apply to the basic concepts of the startup inventory. These include future depreciation and liquidation value. Therefore, the cost and amount of the loan depend entirely on their perspective and inventory valuation.
Defaulting on a loan repayment could lead to significant loss of inventory. It can prove catastrophic, especially when the startup is running at a loss. It can also become problematic if the ongoing credit card, loan, or other debts keep rising.
A loan default with inventory as collateral can lead to loss of loan without payment, no modes of generating profits, and rise of debts. Ultimately, the business would face problems staying afloat.
Small business owners can face challenges in cash flow if they remain on the waiting list of outstanding invoice payments. However, a startup can put these invoices as collateral to avail a loan.
The lenders provide cash in exchange for the outstanding invoices. They also collect the invoices at the same point. This process is commonly known as invoice financing. The most significant advantage of using invoices as security is that it guarantees cash upfront without waiting for the invoice clearance.
Unfortunately, using invoices as security comes with a drawback. The borrowers require paying fees or other significant costs to the lender. Therefore, the amount of money received from the loan would probably become lower than the total sum of invoices.
The second catch when taking a loan against security would include the borrowing amount. The total value of the loan would always remain lower than invoice sum. Once again, the business would suffer loss but can avail money to overcome an immediate financial crisis.
Choosing the right collateral can prove very difficult, especially for startups with limited resources. It can become more challenging if the startup is struggling to cover its ongoing expenses.
However, the business owner must decide the least valuable asset for them to choose the right collateral. He or she must take into consideration the slightest default, or break in terms and conditions before finalizing the decision.
The secondary decision would rely on the amount of loan required by the business. It is essential to add profits, deduct ongoing debts, and estimate the value of the collateral to come up with the amount.
For example, most office equipment wouldn’t provide £100,000. However, providing property as security can assure such a high sum. Besides this, also consider unsecured loans. These only require a personal guarantee and no security.
Unfortunately, getting an unsecured loan can become more challenging, especially for a business with a bad credit history. Also, the loan amount would remain significantly lower than a secured loan.
Therefore, before deciding the type of loan required for the company to keep these pointers in mind. Also, consider going to a financial consultant to seek assistance on business fund management and other money generation options.