Credit Wisdom

5 Reasons Why Collateral Matters When Applying for Business Loan

Category: Business Loan

Owing to a series of late payments and loan defaults, most financial institutions in India have suddenly become very stern while giving out business loans. In such a scenario, if you wish to apply for business loan, you will have to convince the banks that giving out a business loan to you would not be a bad debt for them. To do that, you will have to take help of collateral.

It lowers interest rates
If you ever carry out a business loan interest rate comparison for all major banks and NBFCs, you would find that best business loans in terms of interest rates are being given out to people who have offered high value collateral. The reason behind this is the uncertainty factor that most small businesses go through. 

The banks want to ensure that they get the whole lent out money back in their kitty, and that is why they tend to increase the rate of interest for borrowers without collateral, so that most of the amount gets recovered within the initial years of the loan. Offering collateral gives the guarantee to the bank, that even if the borrower fails to pay the installments, the collateral can be used for recovery of the remaining money. With this guarantee, the banks can afford to work out a lower rate of interest for the borrower.

It increases the loan amount
High value collateral lets the borrower ask for a higher loan amount. As the bank would have the guarantee of the collateral, they would have little to worry about getting the money back, and thus higher loan amounts gets sanctioned pretty easily. If the borrower becomes a defaulter, the bank will have the right to sell off the collateral asset and recover their money.

It lets the borrower negotiate
Most small businesses struggle a lot to get the best business loans. This is so because they do not have any reputation in the market and banks are really sceptical about giving high value business loans to them. If the business owner has tangible assets, which he can offer as collateral to the bank, it puts him in a stronger position to negotiate with the bank authorities and get a better deal on the business loan.

It lets the business flourish
To build its credibility in the market, most businesses need to launch introductory discount offers and allow customers to buy product on credit for initial days. For this, they need a considerably high amount of working capital. This high amount can be arranged with the help of collateral.

It helps people with poor credit scores
If the business owner’s credit ratings are not very impressive, getting a business loan becomes almost impossible. In that scenario, it is only collateral that can save him. With hefty collateral to support the business owner, banks can overlook the credit scores, if they are not drastically poor, and give the business loan as the business owner would apply for business loan.

Tags: Business Loan Articles