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Imagine you go to a lender to ask for a commercial loan. The lender asks you for a mountain of documents, and if this is not enough, it informs you that you must also present a guarantee. In other words, you must present as collateral some type of property that your lender may confiscate if you do not repay the loan. No one likes to put their own goods or properties into play! Do you have another alternative? Or is it really a good option and could it have advantages that you don’t know? What are the advantages and disadvantages of using a guarantee to obtain a commercial loan?
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A guarantee also called collateral, is a type of asset or property that you offer to your lender to obtain a loan. In the event that you do not make the agreed payments, your lender can use the guarantee to recover your losses.
Suppose you need a $ 100,000 loan to start your business. As your company is new, the bank may hesitate to lend you the money, so the lender may require you to put your home as collateral (provided the value of your home is equal to or greater than $ 100,000). Therefore, you run the risk of being seized if you do not repay the loan.
Technically speaking, collateral is a lien for your lender. A lender can confiscate your assets if you have the main right to do so. This means that in the worst case and if you cannot pay the loan, the lender can confiscate your assets without other creditors intervening trying to do the same. For example, a bank has the right to seize your home when you get a mortgage: they keep this right until you finish paying off the loan. Once you have paid the mortgage in full, the bank no longer has this right.
To summarize, a guarantee provides lenders with security in case you cannot pay your debt. In addition to offering a money-back guarantee to the lenders, the guarantee provides lower interest rates for the borrowers, so if you are most concerned about high interest, presenting a guarantee can also be beneficial for you.
Types of guarantee
There are seven common types of assets that you can present as collateral to obtain a commercial loan:
1. Real estate
Real estate refers to properties in the form of buildings and the value of your home, but also to cars, motorcycles, and boats. It is the most common type of guarantee due to its high value and immediate availability. Many small business owners have access to the capital of their home, so this is an obvious option to obtain a commercial loan. However, keep in mind with this type of guarantee you put your family’s home at risk if you do not pay your debt.
This type of guarantee is viable if you have a product-based business. The lender sends an external auditor to estimate the value of your inventory, and if the lender does not consider it valuable or suitable enough to be resold, you may not be able to obtain the loan.
In case you want to obtain funds to buy specific equipment, the equipment itself can serve as a guarantee. If the lender believes that the equipment you want to buy can retain its value after a while, you have more opportunities to get better conditions.
Another form of guarantee is cash, such as your commercial savings account. For lenders, this type of guarantee is very practical, since they can access this money easily and without having to sell anything in case you cannot repay the loan. But for you, it is a great risk because you could lose all your savings.
5. Invoices payable
If your customers tend to be late in their payments, you can submit those invoices without paying as collateral. It is an excellent option for small business owners who do not have a good credit score, as lenders determine if you are eligible for a loan through the value of those bills.
6. The general right of the attachment
This is the right you give your lender to seize or expropriate your commercial assets in case of default. Although it is technically considered a type of collateral, keep in mind that this general right that you are giving to your lender does not prevent you from using those same assets as collateral for another loan. That is, you can obtain an unsecured loan but with a general right of attachment (which includes any equipment of your company), and then obtain a secured loan using as a guarantee a particular piece of your equipment. Taking all this into account, this general right of attachment is actually a very weak form of collateral and will not be able to reduce the interest rate on your loan because, once again, you have the flexibility and freedom to present any type of collateral.
7. Personal guarantees
It is similar to the general seizure law on commercial assets (which we have seen in the previous section), but this time referred to your personal assets. This type of collateral allows the lender to seize any personal property you have placed as collateral. Like the general seizure right on your business assets, it will not help you much when it comes to reducing your interest rate.
Difference between secured and unsecured loans
Understanding the difference between secured and unsecured loans will help you calculate your chances of obtaining a commercial loan and your interest rate.
Secured loans: with a secured or secured loan, if you do not return the loan as agreed, the lender has the right to seize your assets. As this right offers certain security to the lender, these types of loans are called insured. A secured loan means a lower risk for the lender because you can easily seize the promised collateral by exercising your first lien, and without worrying that another creditor can do the same before them. The amount of collateral required to guarantee this type of loan will depend on the terms of the lender, the type of loan and the amount you want to borrow. The value of what you present as collateral is determined through a process called certified evaluation. It consists of an appraisal of any property, such as real estate, and performed by a certified person. The positive part is that thanks to the guarantee, you are more likely to get the loan and lower interest rates. However, with secured loans, if you don’t pay the loan you run the risk of losing your property, your savings, and even your entire business.
Unsecured loans: On the other hand, although a loan that is not technically insured may involve some type of collateral (such as the general right to seize your commercial or personal assets), this collateral is considered weak, as we have seen previously. If you do not pay your debt, the decision about what happens with your property must be resolved in court, which entails an annoying process for the lender and also does not guarantee that you can finally keep your property. As the lender does not get any guarantee, you will not get better terms on your loan. In other words, there is a good chance that you will get higher interest rates and your loan will end up being more expensive.
What types of business financing require collateral?
After learning everything you need to know about the endorsement, there is one last question we should ask: what types of commercial financing require endorsement?
Asset-based financing is a type of financing offered to finance a particular asset or purchase, such as inventory or equipment, and that serves as collateral at the same time.
Equipment financing is a form of asset-based loan where a lump sum is obtained to buy the desired equipment, which in turn acts as collateral.
Secured commercial credit lines allow you to obtain a credit line instead of a lump sum, but also to borrow larger amounts of money with lower rates.
Accounts receivable financing is also known as factoring. With this option, lenders take a small percentage of each bill payable to receive a refund.
Installment loans are a lump sum of capital that you must repay with regular payments at a fixed interest rate. The lender can request some type of guarantee to minimize the risk of lending you the money.
Types of unsecured commercial credit
Commercial Credit Cards
This is one of the most common financing options among small business owners. It is a quick way to access funds to allocate to any needs of your company and to meet your working capital requirements.
One of the biggest advantages of a commercial credit card is that applying for it does not require presenting any type of guarantee. In addition, it provides a renewable line of credit: this means that you borrow precisely the amount you need and nothing more.
But these two advantages carry a high cost: interest or the annual percentage rate (APR) on the money you borrow can be between 12% and 22% or more, much more than in an unsecured commercial loan. In addition, there are other additional charges (such as an annual fee or an excess usage limit) that you will not find in an unsecured business loan
Learn here about how business credit cards compare to unsecured business loans
In Dopertos Financial we offer commercial loans with terms ranging from $ 5,000 to $ 400,000. Unlike traditional lenders, we offer flexible and comfortable terms :
- Our loans are not guaranteed, which means we will not ask for a guarantee. To evaluate your application, we mainly consider your personal credit score and your company’s global cash flows.
- We offer to finance to borrowers with bad credit and only with an ITIN.
- You can use the funds for a variety of purposes: working capital, equipment purchases and also to pay personal loans or credit cards that you have used for commercial purposes. You can even use the loan to buy a second business.
In addition, our requirements are more flexible:
- To request microcredit, your company must generate $ 30,000 in annual sales; To apply for a commercial loan, your company must generate $ 90,000 a year.
- Your company must have been operating for only nine months.
When you are ready to apply for a loan, these are the only documents you will need:
- Your application online.
- Electronic authorization so that we can access the last 6 months of your banking activity.
- Your last year’s tax return that includes your company’s reported income.
- Proof of registration for your company.
Finally, our application process is easy and fast. Send your inquiry will take just a few minutes! If you are ready to take the next step, all you have to do to get started is to send this loan application. You will receive an instant response informing you if it has been preapproved. In 24 hours, one of our business loan specialists will contact you to guide you through the rest of the process.