4th Jul, 2023
Collateral loans and funding play a critical role when starting or growing a business. According to the SA SMME Access to Finance Report, the average funding requested by small and medium enterprises was R400,000.
This article will answer all your queries regarding collateral loans so you can make an informed decision following your particular needs.
What is Collateral?
In business, collateral is an asset loan borrowers commit as security to the lender. If the borrower cannot repay their loan with the agreed interest according to the agreed schedule, the lender can use the asset to recover some or all of their payment.
Types of collateral you can loan against
Here are some types of collateral that you can pledge to secure a collateral loan.
- Vehicles (Cars, Bakkies, Trucks, Trailers, etc.)
- Business Equipment (Plant Equipment, Machinery, etc.)
- Others (e.g., high-end watches, gold, etc.)
Pros and Cons of Collateral Loans
Pros:
- Not dependent on your credit history.
- You can often take a large amount of money.
- Interest rates are lower compared to those for unsecured loans.
- More flexibility in terms of a repayment period.
Cons:
- High risk of losing your collateral if payments aren’t made on time.
- If you default on your loan you’ll lose your asset(s) you’ve put up for collateral.
What to consider before entering into a Loan Agreement for Business Funding
You should discuss the following things in-depth with your lender so that you’re on the same page.
- Loan Amount: You should know the amount of funding you need and the accurate value of the collateral asset.
- Repaying Period: Your repayment term should be long enough for you to pay off the loan easily. Ensure it isn’t extended beyond the needed time because the interest will pile up accordingly.
- Payment Schedule: Agree to a payment schedule you’re confident you’ll be able to follow. Failure to pay according to the schedule could result in additional fees.
- Interest Rate: Find out what the interest rate is, payable on your collateral loan.
- Late Payment Fees: Discuss if the lender will allow any grace period to pay the instalments and what they’ll charge if the payment is late.
- Penalty Fees: These fees should be decided for penalties like paying the whole loan amount ahead of the decided time or if any involved party breaches the agreed terms.
- Definition of Default: Default means not being able to pay the loan. However, you should ensure that the lender's definition of default is the same as yours.
Tips to Determine How Much Business Funding You Need
Your loan amount should be sufficient to obtain your goal but limited to what you can easily pay off. You should analyse your monthly income, mortgages, EMIs, and other expenses you’ll have to make along with the loan payments.
Knowing how much you can set aside for monthly loan payments, you can decide on the amount of loan you need and the time required to pay it off.
How Instant Cash SA can help with business collateral loans
Getting a collateral loan for your business may seem daunting if your chosen lender isn’t reliable. If you need financial help, contact us at Instant Cash SA for our dependable, quick, and easy collateral loan service.
Instant Cash SA can help you get the collateral loan you need for your business in exchange for paid-off movable assets. Our unbeatable interest rates and incredible offers have helped many businesses solve their cash flow problems.
We go the extra mile to prioritise a client’s interests and pride ourselves on our service excellence.
