Indian economy is on the verge of a paradigm shift where small and medium businesses will gradually claim a larger market share. With a trillion push coming from the government of India to make India a $5 economy, there are many small scale businesses being set up in all the cities of India. India is a young nation with more than 65% of its population under the age of 35. This young nation is moving towards entrepreneurship.

A starting or seed capital is required to start any business. This is used to set up the basic infrastructure and cover the operational costs before the business starts making money. The biggest barrier for young entrepreneurs is the problem in getting substantial capital to start their business. This is where online business loans can really help in expediting the process. Financial institutions provide great opportunities for entrepreneurs to get loans for their business.

Taking a loan against collateral is one of the best ways to secure capital for a business. You can use a business loan calculator to calculate the amount of interest to be paid and the tenure of loan according to your requirements. In this article, we will be talking about the guidelines on how to effectively use collateral to secure a business loan.

What is a Loan against Collateral?

Collateralized loans are schemes offered by financial institutions where the loan agreement is backed up by a tangible asset like a piece of land. The inherent security in this type of agreement allows for a more flexible tenure of repayment and a lower rate of interest on the amount of loan.

Even the amount of loan that can be availed is very high in this case. Hence, this type of loan is ideally suited for the purpose of business. As a small business owner, you can use various assets like residential, commercial, manufacturing units as collateral to avail business loans at better terms.

Guidelines to Effectively Use of Collateral

Using collateral for securing capital for your business is a smart choice. However, you should pay attention to a few things before finalizing the deal. This will give you an edge in the negotiation and you can effectively put your asset to good use.

1. Loan-to-Value (LTV) Ratio

The percentage of the value of the security which the financer is ready to grant as a loan is referred to as Loan to Value (LTV) Ratio. A loan for business is usually offered on the basis of parameters like cash flows and debt metrics. However, the upper limit of such loans depends on the market valuation of the asset being used as collateral. A residential house as collateral can provide the highest LTV. The LTV in this case can go as high as 85%. The value of LTV reduces as we go from commercial properties to manufacturing units.

2. Papers in Order

Having your papers in order really helps in expediting the process and striking a better deal with your lender. If the asset is completely owned by you and you have documents that clearly prove the same, then the financiers will be happy to give a higher LTV at an attractive rate of interest. The legal team of these financial institutions will ask for copies of all the relevant documents showing any change of ownership in the past and will verify the authenticity of the same.

If everything is found to be in order, then you have an upper hand as the lenders are willing to give money. Hence, to strike a better deal and effectively use your collateral, make sure to have all the documents to show your undisputed ownership of the asset.

3 Do Your Research

People rarely do the right kind of research before they apply for loans. Judging a lender only on the basis of an attractive rate of interest being offered is not enough. You have to check the other aspects too. LTV is surely a huge parameter to look into. A financer offering a greater LTV for the same asset values your agreement more than the other. You should always compare the various schemes to look for a suitable LTV value. The tenure of repayment for online business loans also becomes important when you are taking a loan for doing a business. To not let the EMIs eat into the cash flows, you have to negotiate for a flexible and longer tenure for repayment.

Using these broad guidelines, you will be able to make a sound decision while securing a loan for business. Make sure to make the best use of your asset and get as much as you can from the lender. The inherent security provided by the asset to this agreement gives you an upper hand. Use the guidelines given above to effectively put your asset to work and generate seed capital for your business. You can use a business loan calculator to compare the different schemes available in the market.