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Understanding Business Collateral

What is Business Collateral?

What is business collateral?

If you own a business, you might need funds to run and manage its guarantee effectively. Such funds can be raised by either opting for a secured loan or an unsecured loan. You may also need to offer collateral to approve the loan application. But, what exactly is the business collateral?

Collateral is an asset or property, offered to the lender against the loans.

The collateral thus acts as a form of protection for the lender. A loan backed by collateral is known as a secured business loan. Collateral may take the form of real estate, inventory, or other kinds of assets. It is depending on the purpose of the loan. The collateral-based funding fetches a lower rate of interest.

For Example – Let us suppose that Mr. Raman owns a business. So, he needs a fund for expanding the same. He also owns a property that is registered in his name. In such a case, Mr. Raman can use this property as security against the loan. Thus, He obtains a secured loan against the property.

Kinds of collateral

The following are the kinds of collateral used against the loans:

1. Real Estate

The borrowers maximally use real estate assets as collateral. Eg building, apartment, premises, flat, or bungalow. The land is also used commonly as collateral.

2. Equipment or Machinery

The borrowers can, however, obtain loans against the equipment as well as machinery by keeping them as collateral against loans.

3. Inventory financing

The manufacturing companies can have a crore of rupees stock which has to keep idle till the time it gets converted into cash. Also, the turnaround time for converting to cash is high. In such a case, the inventories can be kept as collateral for acquiring funds.

4. Invoices (unpaid)

The unpaid invoices. i.e., the outstanding invoices are commonly used as collateral. In the cases of Bill discounting and Factoring, such invoices get discounts. So the fund availed against them.

How does business collateral funding work?

For availing of a collateral-based or secured loan, one must possess a tangible and lawful asset as collateral. So, Unregistered or unlawful assets are unlikely to get funding. Next is the valuation of the property, whether the property serves the purpose of the required amount. Since the volume of funds depends upon the value of the mortgage asset and one cannot get funds beyond that. The loan has been given based on the fair market value of the property.

Benefit of collateral-based loan

  1. Loans are given against the assets. That will be used as collateral. The assets include fixed and tangible assets like land, building, machinery, etc.
  2. Lower interest rates as compared to collateral-free loans.
  3. More flexible tenures and repayment options than regular loans.
  4. Faster approval process.

Collateral vs. Security

Collateral and security are two different concepts. Below is an explanation of both.

Collateral is any fixed or tangible asset. The borrower gives it to the lender in order to secure a loan. These include land, building, property, machinery, etc.

The ownership of the mortgage asset stays with the lender throughout the time the borrower is paying the loan.

Whereas, security refers specifically to financial assets (such as stock shares). That is collateral against loans. These include bonds, futures, swaps, options, and stocks.

Why Terkar Capital?

Terkar Capital is one such financial institution in India that provides a wide range of products to clients. It studies all the aspects of financials, CIBIL score, business plan, industry, sales, etc. We arrange conventional and non-conventional debt and equity funding solutions. That too at a reasonable cost of borrowing. Our timely and confidentiality in the services makes us different from others. So whenever it is raising funds for corporates, Terkar Capital is ready to serve you at your best!

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