If you are interested in the idea of taking out a Business Loan With Collateral, here is everything you need to know. A collateral is an asset that a borrower pledges to a lender to secure a loan. If a borrower is unable to pay back a loan in which collateral is pledged, then ownership of the collateral is transferred over to the lender. In essence, collateral is used as a means of securing the lender if a borrower defaults on a loan. In the case of most business loans, a lender will ask for collateral for one of two reasons: 1. If the business has a low credit score, 2. If the loan amount exceeds a certain amount (e.g. Rs 50+ Lakhs). A business loan made with the promise of collateral is known as a secured loan.
Therefore, it is important to know the benchmarks a lender will use when assessing your creditworthiness for a business loan. Further, it is useful to know the types of collateral and how they are evaluated by lenders. If you are searching for a business loan provider in Delhi or Gurgaon, you can visit one of our Fullerton branches. Fullerton has over 700 branches ready to address your business loan needs, set up across 600 towns in the country.
Assessment of Creditworthiness by Lenders
The various facets lenders look at before estimating the amount of collateral required is an important step in the process. For smaller loans, a good credit score means that you may not be asked to attach any collateral at all. In the case of bigger loans where collateral will be mandatory, having a good credit score can reduce the amount of collateral that needs to be attached.
The primary areas lenders look at when assessing a borrower’s credit score are the capacity to repay, availability of capital, company character (trustworthiness), and loan conditions. If you have a good idea of your credit score and the value of your current assets, then you can estimate the amount of collateral that will be attached.
Evaluation of Collateral
There is a Loan Against Property (LTV) formula that will allow you to assess the loan amount you can receive based on the value of the attached collateral. For example, if the market value of the attached collateral is Rs 1 Cr, then the loan amount you can acquire will be between Rs 60 Lakh to Rs 75 Lakh. If the collateral you have provided does not assure you the loan amount, then you can utilize one of the following options:
- Supply additional collateral
- Provide a larger down payment
- Accept a lower loan amount\
Types of Collateral
Remember that lenders prefer collateral that has a high current value and stable future market value. Here are some of the types of collateral you can consider using when applying for your business loan.
Real Estate: Real estate collateral is one of the most preferred forms of collateral by lenders. Given that the evaluation of real estate is normally quite high, attach property as collateral primarily when you are looking to secure a large business loan. Since the loan amounts are typically larger, this type of business loan with collateral is usually long-term.
Vehicles: You can offer both personal and company vehicles as collateral.
Equipment & Inventory: A company’s manufacturing and office equipment that has a high current value and stable future value can be used as collateral as well. The same applies to a company’s inventory as well.
Savings: Savings are a common form of collateral employed. Since lenders don’t have to worry about liquidating the asset, it is readily accepted. However, attach your savings account with some caution.
Accounts Receivable: In case of a loan default, a lender can collect overdue payments via a company’s outstanding invoices.
The amount of collateral you need to provide a lender will depend on your overall credit score and the loan amount you require. A business loan with collateral is the best way to receive approval for a large loan amount. A good credit score can lower the amount of collateral you need. Ensure you know the LTV of the collateral you are attaching to understand the loan amount you are entitled to. Numerous kinds of assets can serve as collateral for your business loan, and choose the one that suits your company best.
If you wish to seek professional advice, our branches serve as a Business Loan Provider In Delhi and across the whole country.
Visit one of our Delhi or Gurgaon Fullerton India branches below:
Address: Unit – 2 & 3, 1st Floor, Opp Red Cross Hospital, Csc Pocket – I Dilshad Garden, New Delhi, Delhi 110095
Call: 011 2213 3240
Address: A2 / 33 Feroze Gandhi Marg, Near Moolchand Hospital, Lajpat Nagar – 2, New Delhi, Delhi 110024
Call: 011 2984 0861
Address: 41 And 42 And 43, Jwala Mill Road, Near Hsiidc Complex, Sector 19, Gurugram, Haryana 122016
Call: 1800 103 6001