In the US, the average small business is eligible for a $371,000 business loan.

One of the biggest issues facing small businesses is cash flow, so that money can help. Even after have looked at your options and decided a collateral business loan is your best option, you aren’t done.

There is still a lot to think about. Loan terms can vary wildly, so you need to be careful making your choice. We are here to help. Check out our insider tips before choosing a lender.

1. Research Your Options

Make sure you do your research so that you are fully informed on all the options available. Every dollar spent on fees and rates could be spent on other business uses.

The easiest way to get financing is to walk into your bank and apply for a conventional loan. Unfortunately, small banks have very low approval rates. If you look for a lender outside your immediate community, this can open opportunities and increase your chance of being approved.

Each lender will have their own criteria for funding. Some will put a large focus on business and credit history. Some smaller lenders focus on projected profits and cash flow so it is important to be aware that criteria will vary.

2. Apply For The Right Amount

Unforeseen expenses are sure to arise in normal day-to-day situations. The last thing you want is to borrow money that isn’t enough to meet your needs.

If you don’t get the right amount at first, you could see yourself seeking extra loans. It is likely that they will be more expensive than the first.

On the flip side, accepting an offer that is too large, might not be a good move. Bigger loans, mean bigger payments and a longer payback period.

When comparing offers, make sure you choose the one closest to your needs. Also make sure that if you do have any leftover loan, this can get turned into revenue.

3. Know Your Credit Score

Banks have different credit requirements but good credit is an essential part of the process.

This means that you should also apply for one loan and a time. Lenders will often need a credit report, which can have an impact on your credit score. As a one-off, this is not a big deal, but if you apply to many lenders at one time, it can add up to a large dent in your score.

If you’re an existing business, banks will also want to see that you have demonstrated cash flow to make monthly repayments. They will analyze your past tax returns and existing debt. Make sure you provide a financial plan that illustrates you’ll be able to meet your loan payments.

4. Remain Aware of Your Collateral

An asset you can use as collateral will have a title of ownership, and banks will only lend if they can get a title back. Buildings and cars are the most common forms, but if you have equipment with a title of ownership, you can use that too. If you are a small business, there are a few other assets you can use that you might not have considered.

Business Inventory – The challenge is that lenders may be more hesitant to take it on. Chances are, they won’t be able to sell your inventory if you can’t either.

Accounts Receivable – If you get a big order in, you might not have the resources to meet the needs of this client. In some cases, the bank will allow you to use the order as collateral. This can be harder to authenticate though.

5. Keep an Asset Log

Lenders will be conservative about valuing your assets. If you default, they will need to spend resources to take the assets, find a buyer, and sell. This is factored into their valuations.

A common mistake a business owner can make about collateral is they think it’s worth more than it is. The lender will only care about fair market value today. If you’re not sure, find an independent appraiser to give you an idea of how they’ll value your property.

It is also important to keep detailed records of your assets on your balance sheet. When the lender reviews your documents, they will want to see that you’re paying attention to your assets. This can be simple to do, an Excel spreadsheet will normally meet their needs.

6. Understand the Risks

Taking a loan where you are using assets as collateral runs the risk of losing those assets if you default. It’s important to know and discuss the risks of using certain assets with a financial adviser before committing.

Some small business lenders will ask that the applicant provides their own personal property and assets as collateral. Since most loans are guaranteed by the application personally, all their assets are at risk should the loan default.

Your company may shield you from these risks, but a default will inevitably still affect the owner, especially if you are the only shareholder. When looking at loans, it is important to ensure that you only leverage what you are capable of losing.

7. Know How to Negotiate

It should be possible to secure a loan with commitments you are comfortable with. You can gather loan offers from different lenders and compare your options.

It can be an intimidating and daunting process though. Because of this, it is common for business owners to settle for the first offer that meets their needs. This can be a decision they later regret, as the higher rates and short terms can put an enormous strain on cash flow.

When reviewing offers, consider the loan-to-value ratio of each. This is the percentage of an asset’s value that the lender is willing to advance funds against. The higher the percentage, the less collateral you’ll need to cover the value of the loan.

If you feel that there is room for better terms, never be afraid to negotiate.

The Best Collateral Business Loan

If you follow these tips, you’ll have your pick of the collateral business loan offers.

By knowing what lenders will be after, and what you have to leverage, you will avoid any nasty surprises. You’ll be in an excellent negotiation position and can save money on fees and rates.

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