Finance Topics
IN THIS LESSON
If you want to expand your business or make an important investment...
… a loan might be a viable financing option
In this video, you will find out what a loan and interest rates are, how to determine whether you need a loan, and what banks require for providing a business loan.
Virtual Transcript
Loan collateral. Finally, the bank will want to see whether your business has strong collateral to cover the loan amount in case you default on your repayment. Collateral is something of value that you currently own, which the bank can take from you in case you do not repay your loan. It's important to think carefully about what you give as collateral. What collateral will you use for your bank loan?
If you offer as collateral for a loan the part of your business that makes money for you and you do not repay your loan, the bank will take your income generating source from you. Therefore, it's important to understand the advantages and disadvantages of doing so. Let's examine the benefits of using your assets as collateral. Number one. Your assets may help you get approved for the loan.
As a business owner considering a collateral loan, the assets already in your possession, such as your house, car, or business inventory, may encourage the bank to approve you for a secured loan. Number two. You might be approved faster for the loan. The ability to demonstrate the value of assets in your possession may help a bank approve your collateral loan faster based upon the worth of those assets. Now let's look at the disadvantages of collateral loans.
Number one. If you don't repay the loan, you will lose your assets. It's a risky proposition to offer assets for collateral that can be taken by the bank if you don't repay the loan according to the terms set forth, especially if you use your personal assets as collateral. Number two. Your monthly payments could be higher than you can afford irrespective of the collateral available.
If you offer high value fixed assets as collateral, for example, your house, a bank might approve you for a loan based upon that high asset value. However, just because you have the fixed asset available does not guarantee that you will be able to afford the monthly payments on the loan, which means you could risk losing your assets and the business. To avoid this, make a decision on whether to take the loan based on your cash and sales projections rather than the collateral you have available. Now that we've covered everything from business loans to the benefits and risks associated with collateral loans, let's try an exercise.