Home Money & Finance Do You Need Collateral to Get a Small Business Loan?

Do You Need Collateral to Get a Small Business Loan?

by Olufisayo
Small Business Loan

Depending on the type of lending institution you will go to, the answer is both yes and no. For example, some or most banks in Singapore need collateral even for small business loans. You have to remember that setting up and maintaining a business can be a risky investment. In case the borrower’s business will not be profitable, setting collateral is a measure that some banks take to minimize their risk. If you do not want the bank to seize your property, then it is important that your business should succeed.

On the other hand, getting an unsecured business loan is also possible. However, like making a secured loan, you need to understand the risks involved in making one. For example, you should note that unsecured business loans can be difficult to avail, can mean higher interest rates and have a shorter repayment schedule. Also, the lender may require you to sign a personal guarantee, which is a promise that you, being the business owner, will be responsible for paying the loan should your business default on payment.

There are many advantages and disadvantages that each kind of loan can offer. Choosing whether to get a secured loan or an unsecured loan can be difficult. You have to weigh in the circumstances that can affect your loan. To help you decide, read this article.

Small Business Loan

WHAT IS COLLATERAL?

First, let us dive into the meaning of collateral, and why it is important for both lenders and borrowers.  Collateral is a financial term that refers to an asset or a property that a borrower can offer to a lender in exchange for a loan. When this happens, the borrower and the lender makes a secured loan. However, if the borrower will not be able to pay back the loan, then the lender has the option to seize the asset from the borrower.

WHAT ARE EXAMPLES OF COLLATERAL?

Examples of assets or property that a borrower can use as collateral include, but are not limited to:

  • Borrower’s house and lot
  • A piece of land that is owned by the borrower.
  • Borrower’s car
  • Stocks, bonds, or any kind of investment maintained by the borrower

HOW MUCH CAN I GET IF I MAKE A SECURED LOAN?

The value of your asset will depend on its estimated fair market value. Most of the time, an assessor or an expert will appraise the value of the collateral.  Lenders will require you to set collateral that has an amount or value that is greater than the principal amount of your loan. However, it does mean that the lender will give you the full amount of your asset’s fair market value. Lenders will only take a certain percentage of your asset’s fair market value as a basis for your loan. For example, lenders can lend you 30% to 80% of the market value of your collateral.

WHY IS A COLLATERAL IMPORTANT?

For borrowers

If you are going to make a small business loan, collateral is important to improve your chances in getting an approval. Even if you have bad credit, a lender can grant your loan if you have collateral. Also, making a secured loan can give you a lower interest rate compared to an unsecured loan.

For lenders

Collaterals are needed to make a secured loan. In case you default on the loan, lenders can seize the agreed collateral and sell it to recover their loss. Lenders can require you to set collateral depending on the type of loan, the amount of your loan, your credit history, and the agreement between you and the lender.

WHERE CAN I GET AN UNSECURED LOAN?

There are many financial options in Singapore that can lend you an unsecured small business loan. To help you, here are some of the financial options you can choose from.

  • Your family and friends

If your friends and family are willing to lend you money, then you can take the opportunity that they are giving you. They may charge you with no interest, and may not set a deadline for repayment. However, still, you must pay back the money as soon as possible. If you fail to pay them back, then it can strain your relationship with them.

  • Government grants

There are government grants that offer an unsecured business loan for startup businesses. However, being eligible can prove to be difficult. You have to prepare a detailed proposal that can entice the government to grant your request.

  • Banks

Fortunately, some banks offer an unsecured business term loan. The terms of the loan can range from 1 to 5 years. Again, you have to take note that making an unsecured loan can mean higher interest rates compared to a secured loan. Thus, try to find a bank that can offer you the best deal for your business.

  • Moneylenders

Of course, moneylenders in Singapore are always an option. An advantage of making a transaction with them is that they can grant your loan within a day, or even within one hour. You can visit a moneylender’s website, call them, or visit their office if you want to learn more. Like banks, you can shop around for moneylenders who can offer you the best deal. However, it is important that you should only transact with moneylenders who are licensed and are compliant with the law.

TRYING TO FIND THE BEST DEAL FOR YOU?

Shopping around for a good deal for a small business loan can be difficult. Banks and moneylenders may be making you offers that sound enticing, but it is understandable if you are having second thoughts. If you are having trouble finding a good lender, then use Instant Loan. The website is an independent party that helps people find the right lender for them.

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