Why You Shouldn’t Take Out A Loan That Requires Collateral
There are a number of different types of small business loans entrepreneurs and company owners alike can take out to help them fund their businesses. In all cases, lenders require certain criteria to be met in order for them to approve your small business loan. They might ask for your credit score, your tax documents, even bank statements. Some lenders will even ask for you to put up one of your assets as collateral for the lent money. Although this is an option that many lendees take, we are suggesting that it might not be the best idea for a small business owner. Here are 3 reasons why you might want to pass on the collateral-required loans.
1. Long Processing Time
If a lender is asking you to put up an expensive asset as collateral, the idea behind it is that you have placed something of equal value to the money you’ve borrowed, on the off chance that you are not able to repay it back to the lender. This seems simple enough, however, unlike a solid loan amount which can be counted, the asset you put up (such as your home or your car) does not come with an exact price tag. It will take time for the lender to check in on your asset that you’ve offered up, to make sure of its value. This type of loan can take much longer to approve than a loan that only requires a credit check, where the numbers are laid out in front of you on your statements.
2. Lack Of Ownership
Maybe you’re just starting out in the business world, and you want to build your business and take it to the next level. Just because you have your business (or only your business idea), does not mean that you happen to own a worthwhile asset that could be used as collateral. The idea of your business is to eventually be making good money for yourself and your employees so that you will be able to buy your own home or your own luxury vehicle, but most people do not start out already owning them. Instead, go for a loan that doesn’t require you to put up assets as collateral, and then grow your business until you have enough to buy the assets of your dreams.
3. Risky Business
So, let’s say you take out a loan, go all-in for your business, and it fails. Unfortunately, this does happen from time to time, and sometimes it happens after you’ve already spent all of the cash you owe. If you’ve put your assets up as collateral, you will have a much harder time trying to find a new place to live, than finding a way to simply pay back the money. You could always take out other loans that can consolidate your debt until you get back on your feet. However, if you’ve put up your house to back the lent funds, you’d be in a much more difficult situation.
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