What do you own that you would be willing to put on the line in…
Is there anything of value that you own, that we can take, if you don’t pay us back? Now, we’re not saying that this is exactly the way in which bank loan officers formulate this question. But for the many Canadian business owners who have applied for business loans, a version of this question has often been asked of them. To a bank’s loan officer, collateral is incredibly important.
As Susan Ward aptly describes on TheBalanceSMB.com, “collateral refers to assets that you are willing to put up to secure credit, such as a small business loan. Loans that use tangible assets as collateral are called secured loans (as opposed to unsecured loans). The advantage of secured loans is that they often have lower interest rates than unsecured loans.”
What are some different examples of collateral?
The collateral a bank’s loan officer generally looks for is a piece of property of great value. The most common examples are a house or other real estate property, a vehicle or business equipment. As long as any of these assets are in your name (meaning the bank can seize them from you specifically), they can be used as collateral.
The bottom line here is that the bank wants to ensure it doesn’t lose out on the deal which is offering your business a loan. In the event you have trouble making the monthly minimum payments to repay the loan, the bank knows it can take something of value from you. The bank will take the seized asset and sell it to raise money to repay your loan. “That’s why lenders love collateral,” writes Ward, “If the loan goes south, they’ll still get something out of lending you the money.”
How is the value of collateral determined?
The value of collateral changes over time. This, of course, is most obvious when it comes to vehicles as they depreciate in value as they get older. For real estate, it all depends on the current state of the market. As Ward notes, the asset value of a house and property may be substantially less when a loan needs to be renewed and the collateral is being reassessed.
“When looking at assets, typically the lender conducts a collateral assessment and appraisal review process to determine the market value,” she explains, “However, the assigned collateral value is normally closer to the ‘fire-sale’ value rather than fair market value. In a situation where the lender needs to sell the pledged collateral assets to recover the amounts loaned, they may under-price the assets for quick sale.”
When is collateral a non-issue for business owners?
That answer is easy! 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!