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Business Loan
What is a Business Loan Collateral? - Types, requirements & eligibility
The pursuit of growth and expansion often requires more than just a visionary idea and determination — it demands tangible support in the form of financial backing. This is where the concept of securing a Business Loan with the right collateral comes into play.
What is business collateral?
At its core, Business Loan collateral is an asset that a borrower offers to a lender as security for a loan. Collateral is a lender's safety net, reducing the risk associated with lending and often enabling borrowers to access better interest rates or higher loan amounts. Axis Bank offers Business Loans up to Rs 75 lakh without requiring any collateral or asset as security.
Common types of collateral for Business Loans
Lenders have a diverse range of requirements and, correspondingly, the types of assets that can be accepted as collateral are varied. Understanding what type of collateral is needed for a Business Loan is crucial when preparing to secure financing:
- Real estate: Often considered the most valuable form of collateral, real estate can include your business premises, commercial property, or even your home. The value of real estate tends to appreciate over time, offering lenders a high level of security. This option can be particularly appealing for long-term loans or larger amounts of financing.
- Business equipment: This can range from manufacturing machinery to office computers and printers. Such assets are integral to the daily operations of a company, making them valuable as collateral. However, the depreciating value of equipment over time means lenders may be conservative in their valuations.
- Vehicles: Any business or personal vehicles, provided they hold significant value, can be a flexible form of collateral. Though like equipment, they depreciate. Lenders will consider the age, condition, and market value of the vehicles when assessing them as collateral.
- Inventory: The products and goods your business holds for sale can also serve as collateral. This type of collateral is dynamic, changing in value and quantity over time. Lenders may require regular updates on inventory levels and values to maintain the loan agreement.
- Accounts receivable: The money owed to your business by customers can be leveraged as collateral. This is an attractive option for businesses with strong sales but slow payment cycles. Lenders will assess the quality and reliability of these receivables when considering them for collateral.
- Investments: Stocks, bonds, and other investments can act as collateral, reflecting your business's financial health. These assets can be quickly liquidated, making them attractive to lenders. However, their value can fluctuate significantly, which may affect the loan terms.
- Personal Assets: In some cases, personal assets like your home or personal investments can secure a Business Loan, particularly for small businesses or startups. This approach increases the stakes for the borrower but can make securing a loan possible when business assets alone are insufficient.
How much collateral do business lenders require?
The amount of collateral required by business lenders varies based on several factors, including the type of loan, the lender's policies, the borrower's creditworthiness, and the overall risk associated with the loan. Generally, lenders determine the amount of collateral needed using a loan-to-value (LTV) ratio, which compares the loan amount to the value of the collateral.
The LTV ratio is a crucial metric lenders assess. For Business Loans, LTV ratios typically range from 50% to 80%, although they can be higher or lower depending on the specific circumstances and the lender’s risk appetite.
Also Read: Boost your business with 24x7 Business Loans
Eligibility criteria and documents required
When you're ready to apply for a Business Loan, make sure you have the following documents:
- Know your customer (KYC) documents: These are used to verify your identity and may include your passport, driver's license, or other government-issued ID.
- Completed application form: Ensure that the loan application form is thoroughly filled out and signed.
- Financial statements: Provide documents that reflect the financial health of your business, such as profit and loss statements and balance sheets.
- Bank statements: You'll need to submit statements from your business's bank account covering the last six months.
- Tax documentation: This includes your PAN card or Form 60, as applicable.
- Proof of business: Documents such as business registration certificates or other legal documents that verify the existence and legality of your business.
Axis Bank's Business Loans offer a lifeline for the self-employed with loan amounts starting from as low as ₹50,000 and extending up to ₹75 lakh. With the possibility of spreading repayments over 6 to 60 months, these loans provide the financial flexibility required to steer your business towards its next phase of growth.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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