Collateral loans can allow you to get better rates and terms on business funding. Prime assets for collateral include inventory, equipment, real estate, and investments. Often, the asset you are financing itself can be used as collateral. As a result, you can get what you need without depleting cash reserves.
What is Collateral?
According to Investopedia, collateral is:
“…an asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan. The collateral acts as a form of protection for the lender. That is, if the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses.”
Now, here are some examples of collateral loans.
You can use the inventory you want to sell as collateral for a loan to buy the inventory!
Inventory collateral loans can be in the form of a revolving line of credit or a short-term loan. The funds can purchase products for resale. In fact, the products typically serve as the collateral for the loan.
Of course, there may be restrictions on the type of inventory you can use. For example This not allowing cannabis, alcohol, firearms, or perishable goods is common. Also, there can also be revenue requirements or a minimum FICO score.
Interestingly, Kickfurther is a combination of inventory financing and crowdfunding. With this platform, you get financing from supporters and fundraise directly to them. They buy through what’s called a Consignment Opportunity.
Consequently, your customers own the products they help fund. That is, until they are sold by the brand. As soon as the products sell, the customer earns payments. Kickfurther also offers an online store for businesses to market and sell their products. It is possible to get funding for up to $2 million in inventory.
Payback terms will vary. However, at the end of each sales period you submit sales reports and provide payment for inventory sold. Furthermore, you must provide a monthly accounting of current inventory levels.
There are several ways to use equipment to get collateral loans.
These are collateral loans you can use to purchase hard assets for your business. Terms for equipment financing through Credit Suite are as follows:
- Companies must have at least one year in business
- You can get approved even with challenged credit
- You won’t need financials to secure equipment financing
- Approvals take as little as 24 hours
In contrast, you can also lease equipment rather than buy it outright. Often, you will put down less money than you would if you were buying. In addition, you may be able to negotiate flexible terms with an equipment lease.
Even better, it’s easy to upgrade equipment after your lease ends. Of course, this is helpful if your equipment is something like a computer which quickly becomes obsolete.
- Terms for equipment leasing through Credit Suite are:
- Personal credit score of 640 or above
- Provide lenders with any requested details on the equipment you are getting
- Up $10,000,000 in equipment financing possible
You can also use equipment you already own as collateral. Basically, you sell equipment to a lender for cash, and then lease it back from them. As a bonus, this lets you unlock Section 179 tax savings and depreciate your entire equipment purchase in the first year.
Of course, term lengths and the amount you can finance will vary. First, you need at least one larger piece of higher value equipment to qualify. Then, you can get funding in as little as 3 weeks. Generally, a lender just wants to be sure your equipment does not have any liens against it.
If you have investments, you can use them to gain access to funding for your business through collateral loans without worrying about credit scores.
IRA financing allows you to invest a portion of your retirement funds into your business. The result is, you gain more control over the performance of your retirement plan assets. At the same time, you get access to the working capital you need for business growth.
Usually, you will work with a CPA who will help you. You can cash out the lesser of half or $50,000 from an account that qualifies. If applicable, the CPA you work with will structure a self-directing IRA for the remaining funds.
Some lenders will make loans using securities as collateral. You can use the funds for almost any purpose. This includes buying real estate or investing in a business. The only restrictions to this kind of lending are other securities transactions, like buying shares or repaying a margin loan.
Also, you continue to earn interest on the stocks, and rates can be as low as 1.6%.
Typically, bonds financing is available through large financial institutions and private banks. In general, those that look for these kinds of loans want to make a large business acquisition. Or, they may want to execute large transactions like real estate purchases. In this type of funding, the borrower’s investment portfolio helps the lender determine how much to loan.
Most investment-grade corporate, treasury, municipal, and government agency bonds are fair game. You keep all the interest and appreciation from your securities. To qualify, all the lender will require is a copy of your two most recent securities statements.
If your stocks or bonds have a value over $25,000, you can get approval. Even bad personal credit isn’t an issue.
Bonus: 401(k) Financing
To be fair, this is not a loan. You will not have to pay an early withdrawal fee or a tax penalty. The plan, rather than the individual, owns the trade or business through its company stock investments. Since it isn’t a loan against your 401(k), there’s no interest to pay. Instead, this is actually a change of ownership.
Still, it is business funding you can get using investments, so it bears mentioning.
Officially, the name for this type of funding is a 401(k) Rollover for Working Capital program. The IRS calls it a Rollover for Business Startups (ROBS). Per the IRS, a ROBS qualified plan is a separate entity with its own set of requirements.
Credit Suite 401(k) Rollover for Working Capital program highlights:
- Low rates, often less than 5%
- Your 401(k) will need to have more than $35,000 in it
- Can often get up to 100% of what’s “rollable” within your 401(k)
- The lender will want to see a copy of your two most recent 401(k) statements
- You can get 401(k) financing even with severely challenged personal credit
- The 401(k) you use cannot be from a business where you are currently employed
- It must be from older employment
- You cannot be currently contributing to the plan
Collateral Loans Can Open Up a World of Funding With Terms and Rates that Can’t Be Beat
Honestly, collateral loans open up a whole world of funding you may not be able to get otherwise. One benefit is, it’s typically available regardless of credit history. Better yet, the terms and rates can’t be beat. If you have the option, depending on the need and the situation, collateral loans may just be what you are looking for.