Pros and Cons of Collateral Loans for Your Business

Starting or expanding your business requires a significant amount of funds. Sometimes, your savings aren’t enough to cover the expenses needed. This is where loans can be of help. Business loans in the Philippines can tide you over when you need an extra financial boost.

However, applying for one may be difficult. Lenders see businesses as huge risks because of the possibility that the ventures might fail and go bankrupt. They can be very thorough with the approval process, causing some entrepreneurs to get denied. Other times, they increase the interest rate or require collateral.

Collateral loans are beneficial for start-ups and business owners with bad credit when borrowing money. But what is a collateral loan? And what are the advantages and disadvantages of applying for one? Read on to learn if a secured loan is the best financing option for your small business. 

What are Collateral Loans?

Collaterals are assets you pledge to the lender as long as your loan is active. When you take a collateral loan, you give the lender the rights to your assets, may it be a vehicle, real estate property, stocks, or equipment. Lenders take hold of your property as you use the borrowed money. If you default or fail to repay, they keep your collateral. 

Since lenders see businesses as high-risk investments, they use collateral to reduce their risks of losing money. From a lender’s perspective, the best types of collateral are assets that they can liquidate quickly or easily convert to cash. According to a 2021 Statista survey, the most common loan collaterals used in the Philippines are ATM accounts, land, harvest, vehicles, and real estate properties. 

The value of your collateral and how much you can loan will all depend on the lender. Once you propose collateral, the lender will determine the loan-to-value ratio by appraising your assets. For example, they’ll only allow you to borrow 80% of the appraised real estate value. 

Pros of Collateral Loans for Businesses

Here are the advantages of taking a secured business loan:

• Easy to qualify for even with poor credit history

You can access financing even if you have a below-average credit history. Since lenders secure your loans with collateral, they’re more lenient on application requirements. Secured loans also allow you to build back your credit. With unsecured loans, it can take several months or years to rebuild your credit to qualify for a loan. 

• Low interest rates

Compared to non-collateral loans, lenders usually see collateral loans as a less risky choice. Thus, they’re more willing to offer lower interest rates. If you have a good credit history, steady income, and valuable assets, you can leverage those by shopping around and looking for lenders with the lowest interest rates. 

• Potentially high loan amount

Depending on the value of your collateral, lenders generally let you borrow a higher loan amount. Since they have the collateral as security, they have something to fall back on if you default on the loan. The more valuable and liquid your asset is, the more money lenders let you borrow. 

• Greater flexibility

Lenders are more flexible with their financing options when you put up collateral. For example, they can provide longer terms because of the reduced risks, which means your monthly charges are lower.

How long can a secured business loan be paid? Some borrowers let you pay off the loan for several years, even reaching a “30 years to pay” agreement. 

Cons of Collateral Loans for Businesses

There aren’t a lot of disadvantages to a secured business loan, but here are its major cons:

• The application process may be longer 

The application process for secured business loans may take longer than unsecured loans because the lenders need to appraise the value of your collateral. You also have to provide more information that stacks up to the steps of getting your loan funded. However, the actual speed of the process will depend on the lender—some can be faster than others. 

• Possibility of losing property 

Since you transfer the property rights to the lender, you risk losing your assets. The lender repossesses your collateral when you fail to pay the minimum monthly charges on time. However, this is just if you can no longer make the payments. You won’t lose your collateral if you abide by the lender’s terms.

Easy Approval Process and Great Loan Terms

When borrowing money, you want the best possible rate. If your business has valuable assets that can serve as collateral, get a secured business loan for lower interest rates and more borrowing power—even if you have a poor credit history. Just make sure that the chances of you defaulting are slim to none to avoid losing your collateral.

If putting up collateral isn’t possible, you can always apply for unsecured loans. JK Capital offers fast and easy unsecured business loans. You also have the option to put up collateral to improve your loan terms. Check out your options and apply for a business loan today!