Getting an unsecured business loan is nearly impossible these days unless you are tremendously wealthy, a multi-national organization or don’t really need the money. Thus, collateral does matter.
You can’t offer something for collateral that you do not own, such as the loan itself, or property that you intend to purchase.
However, banks and other lenders do not really want your collateral – they are not in the collateral business – they are in the money business. It is too costly for them to take ownership of such collateral should your business default on payments. Traditional lenders even have to fund allowance for loan loss accounts when the loan is funded and write down the assets value on their books (not market value) when a loan comes past due – all to reduce their losses against faulty borrowers.
Since this seems so painful for lenders, why do they (lenders, banks, financial institutions and other business financiers) require collateral?
Most business lenders look for three sources of repayment. The first is always the business’s ability to repay the debt through cash flow. Cash flow in this case means operating profits or the conversion and sale of current assets (usually inventory) – operating cycle cash flow.
If the business fails to generate enough cash flow, the banks and other lenders what to be certain that they are made whole – not just for the repayment of the principle amount but for any lost interest, fees and costs of taking and selling the asset.
To cover the possibility your cash flow will falter, lenders look at a second source of repayment – which stems from the value of the collateral.
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