Starting a business in and of itself can seem like a daunting task, but for many it’s means to employment, income and a source of cash flow that can sustain a lifetime. Businesses are much different than any other form of finance as they are impacted with many unique items such as taxes and irregular income.
One of the ways many businesses help bring consistency to their cash flows is through debt. Debt in the business world isn’t a bad thing and can end up benefiting all involved. It benefits cash flows by keeping payroll and purchasing steady, no matter that the short-term cash flow impacts may be. Now, you may be wondering how you can go about obtaining a business loan and the process is much more involved than a traditional consumer loan. A key part in obtaining a business loan is to have assets or collateral.
Collateral in short is an asset the lender to use to back the loan and be a lien holder. This is in case you fail to repay you loan, the lender will have rights to sell and retain the proceeds to cover the debt still owed. Now, you may be wondering what you need and this article will explain a few points to consider when looking for a business loan.
The first important item to consider is you’ll likely need physical assets if you’re looking for a sizeable loan. Hard or physical assets can include machinery, automobiles, real estate or anything of value that is tangible. This is more so the case with business that are new because the lender doesn’t have any previous sales to go off.
However, if you have an established business then physical assets become only slightly less important because you likely have a proven track record. While each financial institution is different, odds are they will require a percentage of the loan be secured to ensure they have a level of protection in the even you fail to repay your business loan.
Next, you will need a solid and detailed business plan to accompany any assets you may have. A business plan essentially tells the lender what you plan to do with their money and how you can begin repaying them. Think of it as investing in a stock, you certainly want the company to do right by you.
Within the business plan you can have physical property and intellectual property, or IP for short. The lender may consider the IP you have, but you’ll need paperwork to prove the property is safe via copywrite or trademark. While it may seem difficult, this is another way to add collateral to a loan.
If you need help with creating a business plan the Internet is full of examples. Keep in mind that the lender is going to want all physical assets recorded, along with current (if applicable) and projected cash flows. Essentially bring an entire financial report with a few pages to summarize your business.
Lastly, you’ll want to take inventory if you have any assets that are leased, because these will not be eligible for collateral. The reason for this is the owner will simply come by and repossess the asset if you fail to make your lease payments. While it may benefit your cash flows, it will not help your situation when listing assets for collateral.
Instead, look to find physical assets that aren’t too expensive and begin purchasing them. As you slowly begin to accumulate assets, this can help you obtain a business loan in the future. Keep in mind the affects of depreciation, meaning as the asset gets older it carries less value.
So put simply, you can use physical or potentially intellectual property that has value as collateral on a business loan. Business loans are much more individualized so ensure you work closely with your business lender. Before committing, shop around and find what rate you can get. From there, understand their underwriting process a bit and go from there. While it may seem like a bit of a process, understanding how the process works will save you time and money in the end.