With the growing popularity of peer-to-peer lending, more and more investors have become interested in this space, and peer-to-peer lending has become a popular way to raise capital for small businesses.
While banks are hesitant to lend money to small businesses, peer lenders can be found everywhere, you might even know a few people who lend money to friends or family members.
What are Collateral Loans?
Collateral loans are loans that require the borrower to secure the loan with assets they own instead of the lender putting money in their checking account this means that the borrowers are liable for the repayment of the loan if they don’t repay it.
The lenders use the assets as security and can seize the assets in the event of non-payment the most common types of collateral loans are asset-based loans, lease-based loans, and COD terms.
Types of Collateral Loans
Asset-Based Loans: With an asset-based loan, the borrower pledges a portion of their assets as security for the loan the most common types of assets that can be pledged as collateral are real estate and vehicles.
Lease-Based Loans: With a lease-based loan, the lender takes ownership of a portion of the assets as security, usually at the end of the lease term expiration dates on contracts are often considered fair consideration for this type of loan.
Cash-on-Delivery: With a COD loan, the borrower pays the lender the amount of the loan in full before the assets are transferred to the borrower this type of loan is usually used in international transactions.
When Should You Use Collateral Loans?
Collateral Loans are usually not the best option for starting your business rather, they are better suited to help you scale your existing operations.
Collateral loans are most useful for companies that have significant assets and/or cash on hand rather than delay payment, a COD loan can give businesses the cash they need to pay their bills.
How to Get a Collateral Loan for Your Business
Before you apply for a loan, you’ll want to know what information you need to fill out the application this will include things like your business name and address, the amount you want to borrow, your business’s financials, and your personal financials.
In most cases, lenders will also want to see a business plan and a business valuation depending on your lender, you may also need to provide additional documents.
Once you’ve gathered all of this information together and it’s ready to go, you need to apply to a lender, it doesn’t matter which lender you choose; just make sure you apply to at least one lender so that you have multiple options for funding.
Final Words: Collateral Loans Aren’t Just for Startups Anymore
Collateral loans are becoming more common, but they are still not as common as bank loans, serious investors are much more likely to put their money in a bank account than hand it over to a stranger on the internet.
If you want to take advantage of the collateral loan market, you need to be strategic about the lenders you choose to work with, besides, when it comes to funding your company, you’re better off getting more than one bite at the apple when you go to the bank than when you go to the peer-to-peer lending market.
You can’t predict which investors will fund your company, and a bank loan is much more certain than a peer-to-peer loan.
