Unfortunately, every small business will experience times where cash-flow is not what it needs to be. Extra cash may be needed to keep things running smoothly while you wait for debtors to pay you what you’re owed. In addition, if you are planning to expand or purchase necessary assets for your business, a loan may also be required. Whatever the case may be, you won’t want to jeopardize your cash flow in order to buy needed assets.
You should know that getting a commercial loan for your small business comes with a risk. For both you and the lender. This is why small business loans require collateral. While the bank puts up the money for you, you make an agreement to pay them back. However, they have to deal with the possibility that they might lose their money if you don’t make money; thus, you give them collateral. In the event that you do not pay back your loan along with the interest in the contract, the lender at least has an asset of yours worth the same value of the loan.
According to Business.com, “Collateral will work differently depending on what you own, what your company owns, what sort of loan you are going for, and the terms of that loan. It’ll also depend on what your background is in business and the amount of money you both have on hand, and are looking to borrow from your lender.”
Consider the following different types of collateral available to you:
Debt
It is true that many small business loans are short term and are due to cash flow. However, very few people understand that, in accounting terms, the money you are owed is actually an asset. It is money you have earned, even though you have yet to receive it. When you secure your business loan, keep in mind that you can use this money later on when you are paying back that loan.
Home Equity
Many business people make the decision to refinance the mortgage on their homes to free up cash; this is a means of gaining a substantial amount of funds and quickly. Keep in mind that you are putting your own home on the line – not a decision to take lightly. According to Business.com, “This is an extreme way of refinancing unless the money for the future is secure (should you be using the money to buy the infrastructure for a contract which you’ve already obtained).
Vehicles
Typically, vehicles are a common way to obtain the small business loan a business owner needs. Why? They have a relatively easy to calculate value. For the delivery company that tends to have a lot of money invested in their vehicles, this is particularly useful. Keep in mind that vehicles work best as collateral for edgier investments, since vehicles are a depreciating asset.
Business Inventory and Equipment
As long as the stock is sitting in your store, it can be considered an asset. It can also be used as collateral when you go to secure a small business loan. This also includes any machinery and equipment your business has.
Unfortunately, many small businesses find themselves categorized as “high risk” by traditional lenders for one reason or another. This makes the task of securing a small business loan extremely difficult, if not impossible. When this occurs, it is still possible to secure a small business loan with a high risk provider like First American Merchant. As you plan the future of your business and map out what is required to meet your goals, consider what a small business loan with FAM can offer your business in flexibility and growth.