The process of obtaining a business loan can be complex, with financial institutions carefully evaluating various factors to assess risk. One of the key elements that significantly impacts a borrowers chances of securing a loan is collateral.
Collateral Requirements for Business Loan
Understanding the role of collateral in business loans becomes crucial as businesses navigate the complexities of securing financing for growth. Collateral serves as a safety net for financial institutions, reducing their risk and often making it easier for borrowers to access the funds they need.
Shriram Finance, a leading light in the NBFC (Non-Banking Financial Company) sector, offers secured and unsecured business loans with competitive interest rates and flexible tenure options, making it seamless for businesses of all sizes to scale growth.
What is Collateral
Collateral is an asset pledged by a borrower to secure a loan, which the lender can take possession of and sell if the borrower fails to repay the loan. Common types of collateral include real estate, inventory, equipment, and accounts receivable. By offering collateral, borrowers can often secure larger loan amounts, lower interest rates, and more favourable terms.
Why Do Financial Institutions Require Collateral
Financial institutions require collateral to mitigate the risk of lending. When a business applies for a loan, the financial institution assesses the risk associated with lending to that business. Collateral provides the lender with a form of security, ensuring that they can recover their funds if the borrower defaults. This reduces the loan providers potential losses and can make them more willing to approve loans, particularly for new businesses or those with weaker financials and no robust credit history.
Types of Collateral Used in Business Loans
The most common types of collateral a financial institution may ask for to approve your business loan are:
Real Estate or Property: One of the most common forms of collateral-real estate-including agricultural land, commercial properties, land, and even residential properties, can be used to secure a loan. The value of the property typically influences the loan amount that can be borrowed.
Investments: Investments in stocks, bonds, etc., can be used as collateral for business loans since they usually have a high liquidity. However, since investments can fluctuate in value, loan terms, while using these as collateral, may also vary.
Accounts Receivable: Businesses with outstanding invoices can use these as collateral. Lenders will assess the quality and age of the receivables to determine their acceptability as collateral.
Inventory: Businesses that deal with large quantities of goods can use their inventory as collateral. This is particularly common in retail and manufacturing sectors, where the value of the inventory is substantial.
Equipment: Machinery, vehicles, and other equipment owned by the business can serve as collateral. This is often seen in industries such as construction and manufacturing, where equipment is essential to operations.
The Impact of Collateral on Loan Terms
The presence of collateral often leads to more favourable loan terms for the borrower. Financial institutions may offer lower interest rates, longer repayment periods, and larger loan amounts when adequate collateral is provided. However, the borrower must understand that failure to repay the loan can result in the loss of the collateral, which could be detrimental to the business.
Key Features of Shriram Business Loan
Shriram Business Loan, with its compelling features, stands out as one of the topmost choices for business loans in the NBFC sector. Here are some of its features that can help borrowers make an informed decision:
Loan Starting from RS. 1 Lakh: You can get loan amounts starting from Rs. 1 lakh* with Shriram Business Loan to meet your diverse business expenses.
Affordable Interest Rates: Shriram Finance provides business loans at affordable interest rates starting from 10%* p.a.
Secured and Unsecured Loan Options: Shriram Finance offers both secured and unsecured business loan options that are tailored to fulfil your financial requirements.
Flexible Loan Tenure: Business loans from Shriram Finance offer flexibility, giving you the option to repay an unsecured loan over a period of up to 48 months* and a secured loan of up to 84 months*.
Conclusion
Understanding collateral requirements is essential for businesses seeking to secure financing. By offering collateral, businesses can potentially access larger loan amounts, lower interest rates, and more favourable terms. However, it is crucial to carefully consider the risks involved, as the loss of collateral, like important business equipment and machinery, can have serious implications for the business. It is important for businesses to consult with financial advisors to determine the best financing options for their specific needs.
*Above mentioned loan amount, rates and tenure are as per the company’s Digital Business Loan Policy
About Shriram Finance
Shriram Finance is a leading diversified financial services company in India, offering a wide range of financial products and services across consumer, wholesale, and business finance segments. The company has a strong presence pan India with a network of 3,149 branches and an employee strength of 77,764 with an AUM of Rs. 2,430,40 crores. With a focus on financial inclusion and customer-centricity, Shriram Finance continues to empower individuals and businesses to achieve their financial goals.