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Understanding Business Collateral

The Advantages of Collateral-Based Funding for Businesses of all Sizes

Overview

If you own a business, you might need funds to effectively guarantee the smooth operation and management of your business. 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 collateral-based funding for businesses?

What is Collateral-based funding?

Collateral-based funding refers to the process of securing a loan by offering assets or properties as collateral to the lender. This collateral acts as a form of protection for the lender, assuring that the loan will be repaid. A Collateral may take the form of real estate, inventory, or other kinds of assets. It depends on the purpose of the loan. By leveraging collateral, businesses can facilitate secured debt products that come with several advantages. Such as lower interest rates and more favourable terms.

For Example – Let us suppose that Mr Raman owns a business. 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 secures a loan against the property in this case.

Types of collateral

The following are the types of collateral used to avail funding:

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 in stock which has to be kept 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 collateral-based funding work for businesses?

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, as unsecured debt products do not require collateral for securing funds. 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 one cannot get funds beyond that. The loan has been given based on the fair market value of the property.

The benefit of collateral-based funding

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

Difference between Collateral and Security

Collateral and security are distinct concepts. Collateral refers to any fixed or tangible asset, such as land, buildings, property, and machinery, which the borrower provides to the lender as security for the loan. The ownership of the mortgage asset remains with the lender until the borrower completes loan repayment.

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

Conclusion

When seeking collateral-based funding for your business, Terkar Capital is your trusted partner. We facilitate a wide range of financial instruments tailored to the unique needs of our clients. By conducting a thorough financial SWOT analysis and evaluating business plans, industry trends, sales metrics, and credit scores, we strive to deliver holistic funding solutions to our clients. Count on Terkar Capital to provide collateral-based funding that propels your business towards success.

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