HomeFWJ TakeawayResourcesWhy is collateral important to a borrower?

If you are a company considering entering into a loan it is critical that you understand why you may want to use collateral to secure your business loan funding. Expert legal advice is highly recommended prior to the giving of any collateral to support a business loan agreement.

Below are some of the reasons why collateral is important to a borrower:

  • it reduces interest rates – If the borrower owns assets which can be used as security to back a business loan, it is likely that it will be offered the business loan at a lower interest rate by the funder as the funder will be able to take possession of the assets in the event of an insolvency or other breach of the loan agreement / event of default. Similarly, if the borrower can get another party (individual or company) to provide a guarantee or indemnity this will also reduce interest rates as the funder / financier will be able to pursue any outstanding balances from the third party in the event the borrower defaults;
  • it broadens the scope of lending products available – many providers will not be willing to lend on an unsecured basis which means the choice will be limited. By providing collateral the borrower has a broader range of business loans to choose from which may have more favourable terms;
  • it avoids the need for a deposit – most unsecured business loans require the borrower to put down a deposit of around 10% to 30% of the business loan value which could be prohibitive. Contrastingly, business loans which use collateral are more likely not to require this deposit as the collateral takes the place of the deposit.

Please contact one of expert banking solicitors now for your friendly and informal consultation regarding issues relating to the taking of collateral or any other business loan enquiries. At Francis Wilks & Jones, we have significant experience in banking transactions and offer quick and effective advice.

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