Tuesday, 11 August 2015

Loans Backed by Collateral

Banks are tightening lending conditions, especially for small and medium sized enterprises, says an article published in Khaleej Times on April 30, 2015. The article also says that banks are demanding tougher terms such as more collateral, stricter documentation and shorter tenures. Easy flow of credit is essential for any business to function smoothly. Whether you are a start-up or a sole proprietorship, getting a small business loan from a lending company in Dubai can help you achieve your business goals faster.

Asset Based Lending and Its Advantages

Business loans may differ according to the term underlying their payment and borrowing. Banks will not be ready to give you a business loan unless they are sure of your financial credentials. But a business loan backed by collateral is easy to secure and comes with several advantages.

Business loans are procured for various reasons, such as to provide a boost to the working capital, for business expansion, inventory or equipment purchases, upgrades and more, to help your business grow and flourish. The collateral acts as a safety net and makes a business loan a secured loan. A lending company is Dubai will be more willing to provide a secured loan, as compared to an unsecured one, because it reduces the risk on part of the lender. If a borrower defaults on a payment of a secured loan, the lender sells the collateral to recover the loan amount.

Because of the less risky nature of secured loans, the interest rate tends be lower than for unsecured ones, and businesses can also procure higher loan amounts. Business houses can procure an asset based loan while keeping real property, inventory, cash deposits, gold and equipment as collateral. Apart from the traditional collateral options, the most typical asset based lending for business firms is against receivables. The lender transfers the funds to the borrower based on the value of receivables. Business financing against receivables might be easier to procure due to their high liquidity.

A loan against collateral is a great option for business houses with an existing line of credit, as compared to traditional lending options. Traditional funding options in such cases might have very high interest rates. Before taking a loan against collateral, it is wise know what you can use as collateral and the risks involved in case you default on the loan amount. Also, it is advisable to keep track of the net worth of the asset put up as collateral, since it will give you a better idea how the bank will value your property.
In addition, while procuring a loan from a lending company is Dubai, you could also try and negotiate on the lending rates to land a better deal.