Defining Collateral And How It Helps With Business Loan Approval

What do you own that you would be willing to put on the line in the event that you can’t repay your debt? The answer to that question is one of the simplest ways to define collateral. Collateral is a valuable asset that a borrower pledges as security for a loan. “For example, when a homebuyer obtains a mortgage, the home serves as the collateral for the loan,” explains Julia Kagan for Investopedia, “For a car loan, the vehicle is the collateral.”

How does collateral help with business loan approval?

Collateral serves as a safety net.

Having collateral increases a business owner’s chances of loan approval. This is especially true if your business is a startup or lacks a strong credit history. Collateral assures loan officers that even if a business faces financial challenges, they will have a tangible asset to recover their funds. This increased level of security often leads to more favourable loan terms, such as lower interest rates and longer repayment periods.

“Before a lender issues you a loan, it wants to know that you have the ability to repay it,” informs Kagan, “(Collateral) minimizes the risk for lenders by ensuring that the borrower keeps up with their financial obligation. The borrower has a compelling reason to repay the loan on time because if they default, they stand to lose their home or other assets pledged as collateral.”

Collateral can unlock access to larger loan amounts.

The more collateral you have (or the greater its value), the better chances you have of securing a larger loan. When you pledge valuable assets, such as your home or a vehicle, lenders may be more willing to extend higher credit limits to you. This enables you to fund significant business initiatives, such as expanding your operations, purchasing new equipment or acquiring another business.

“Since you secure a collateral loan with an asset, you give lenders a way to recoup their money if you default on the loan,” affirms Paris Ward on CreditKarma.com, “Because of this, lenders may be more willing to grant you a loan for a higher amount, depending on the value of your collateral.”

Collateral helps you to get better interest rates.

When you pledge collateral, you get what is referred to as a secured loan. Banks typically offer lower interest rates for secured loans compared to unsecured loans. This means you will pay less in interest over the life of the loan. Ultimately, your business saves money and increases its chances of profitability.

“Lenders typically view collateral loans as less risky than unsecured loans,” notes Ward, “For this reason, lenders are generally more willing to charge a lower APR for collateral loans than you’d find with an unsecured loan.”

When applying for a merchant cash advance, you don’t even have to think about collateral!

With Synergy Merchants’ unique merchant cash advance program, no collateral is ever necessary in order for you to be approved. This alternative source of funding has been helping Canadian business owners to grow their companies for decades. We’re sure we can help yours too! To learn more, please don’t hesitate to call us at 1-877-718-2026 or email us at info@synergymerchants.com. You can also apply online for a free, no obligation quote!